Business credit is the grease that keeps the wheels of a business enterprise moving. The fact that business enterprises rely on business loans from time to time is an obvious statement. Regardless of the scale or the diversity of a business — budding entrepreneurs running from pillar to post in search of seed capital or liquidity injection for their business enterprises are a common sight in business circles.
Challenges in Getting a Business Loan Approved
While getting a business loan application approved by a banker, angel investor, or a private equity (PE) fund has always been a tall order. It has become even more complicated in the last two decades in the aftermath of global economic crises. There has been the subprime crisis (2008), the Eurozone crisis (2011) and the lessons learned from the cases of fiscal profligacy in the PIIGS (Portugal, Iceland, Italy, Greece, and Spain).
Banks, private equity investors, angel investors, and lending institutions for business across the world have become even more cautious about approving loan applications due to a vast number of reasons.
Some of the significant macroeconomic challenges that have an impact on the non-approval of business loan applications are as follows:
- Stringent guidelines by regulatory agencies and federal banks
- Impact of non-performing assets (NPAs) on balance sheets of banks due to bad business loans
- Absence of a strong value proposition to be offered through the business
- Lack of a clear definition of the purpose of the business loan
- Absence of well-documented history on the corporate behavior of the firm
- Absence of demonstrated history of credit and payback by the firm
- A weak revenue model to support the payback of the credit
- Lack of the scope to build scale into the business model for expansion
How to Raise the Chances of Getting the Business LoanApplication Approved
Define the Purpose of the Business Credit
First,define the core purpose of seeking business credit. It is of paramount importance that you, as an entrepreneur, be clear about the goals that you aim to achieve through the business credit that you are seeking.
- Do you want a working capital injection for your business to pay off salaries and wages?
- Do you want a loan to pay off existing debt?
- Do you want a business credit to expand your business?
- Do you want a line of credit to reach out to new geographies
- Do you want to diversify your business
- Do you want to embark on a capacity expansion through the establishment of new production units?
- Be very clear about the source of your journey and where do you want to end up?
Decide on the Capital Injection- Debt or Equity
Second, as an entrepreneur, explore the multiple modes of business credit that are in place these days.
- You do not always have to lean towards a bank to seek a capital injection for your business.
- There are other options of private equity (PE) funds
- Angel investors who are also sometimes referred to as venture capitalists (VCs)
- Microfinance institutions (MFIs).
You also have the option to explore capital injections through equity crowdfunding. Banks offer the traditional debt route, PEs and VCs offer an equity route. On the other hand equity crowdfunding is a mechanism that allows your business to lean on broad groups of investors that fund micro, small and medium enterprises in lieu of payback, profit or revenue sharing of sweat equity.
Update your Tax Records
Third, do not forget to be a socially responsible corporate citizen. At the grassroots level, this translates to compliance with regulation and governance norms as per the local laws. Tax compliance is one of the essential factors for micro, small, and medium businesses.
Bankers, PEs, VCs, and even crowdfunding platforms pay a great deal of attention to the details of the tax burden on your business and are particularly keen to study your tax records.
Check for outstanding tax burdens and liabilities and consider a clean tax statement to be a testimony to subsistence level checks before proceeding forward with further processing of your business loan application or liquidity injection that you are seeking.
Assess the Financial Risk Factor Objectively
Fourth,be sure of the financial risk that your business is capable of taking upon itself. Ask yourself where and how to draw the line? There is no substitute to sound financial risk management.
- How much of financial risk is considered to be conservative, and how should you recognize the red flags?
- Work on your financial risk modeling. Your risk modeling should ideally include the expected return on investment (RoI), the payback period of your business, and the net present value (NPV) of the assets of the firm.
- Further, work with an experienced financial risk analyst to assess the unforeseen risk factors that may delay the returns from your project.
- In short, as an entrepreneur, you should be aware of the farthest that you can stretch with the financial risk involved with the capital injection.
- Define the degree of affordable risk (DAR) to yourself first, and you should be in an excellent position to explain it to the bankers and creditors.
3CsMatter: Character, Capability, and Credibility
Remember, bank managers and creditors, watch out for three things here:
- Character–The character here may refer to the value creation potential of the business seeking a capital injection.
- Capability–Capability here refers to the projected risk-returns trade-off faced by the business.
- Credibility– credibility refers to a combination of things, including brand value, the market capitalization of the firm, or the total valuation of the assets in possession of the firm.
Safeguard Your Intellectual Property Rights
One last thing before you pitch your application before a banker, PE firm, or angel investor. Your intellectual property rights are especially applicable to product based and concept selling businesses. If you are into a company that uses technology, data, or digital assets in any way.
It makes enormous good sense to think of your core competence and operational risks in terms of the VRIO model.
VRIO here refers to:
- value (V)
- rareness (R)
- non-imitability (I)
- organizational fit (O).
When you safeguard your intellectual property rights like trademarks, copyrights, and patents you have a very potent weapon to beat the competition in the market and create a solid basis for product differentiation and thus, a unique selling point for customers to lean on.
Having a unique selling point transforms the very nature of your business loan application. It gives you a legal safeguard, a USP to talk about and finally a perfect core competence to draw the attention of PEs and VCs and win their trust.
While this is a list of general guidelines for entrepreneurs seeking a capital injection for their business, more layers and sub-layers of analysis may be added to make your business loan application even better and precise.
One parting shot for entrepreneurs here is to focus not just on justifying why their business deserves a loan or an equity investment but to focus on how a small capital injection can multiply the value creation many times more and benefit investors, clients and employees through a profitable, predictable, sustainable and de-risked business model.
Emma Salvador, a masters in computer science has a knack for computer technologies. She has over 15 years of experience in systems security and IoT.