Many are the times that startups have been unable to scale their fail due to lack of funds. This is due to the fact that in as much as they can get funding from Venture Capitalists or the various startup challenges, the competition for the said funds is usually very stiff as such not many get the funding. Inability to raise funds in order to scale their business leads to many shutting down operations of an erstwhile good business. What many people do not realize is that even startups can get access to funding from financial institutions as long as you have a solid business and the right documentation.
Generally, most people fear taking loans but I believe that you shouldn’t be afraid if you intend to use the funds for the right purpose rather than consumption. The mistake that I have found most people making which more often than not leads into financial difficulties is that they apply for loans to expand their business but somehow along the way they end up using a big chunk of it to fund their lifestyles. Since the funds used for consumption do not have any returns, the individual who took the loan is unable to repay, the loan falls into arrears and that is when the bank comes calling.
The rule of thumb is to only take a loan that you actually need not want and the discipline of only using the funds to run/expand the business and not personal consumption. That said, here are a number of things that financial institutions look out for when giving out loans to small and medium scale enterprises (SME’s).
• Certificate of Registration
You need to have registered your business before you approach a financial institution for funds. Also most corporates prefer dealing with registered businesses so it gives you an edge over those trading as individuals when bidding for jobs.
• Copies of PIN certificates for the Company and directors
• Copies of bank account statements for the last 6 -12 months
• Detailed company profile
• Copy of Memorandum and Articles of Association
• Audited accounts for the last three years together with copy of the latest management accounts.
• Schedule of Debtors and Creditors as per the latest management accounts – age wise.
• Cash flow projections month by month for the next 12 months.
• CV’s of the promoters and top management on the lines of format
• List of major customers and suppliers.
• Budget of equipment/furniture to be bought. Attach pro-forma invoices where possible (for asset financing)
• Copy of the title (where land is being purchased or used as security)
• any other relevant documents to assist in evaluating the proposal.
The documents required look to be many but depending on the amount that you want the bank might ask you for some or all of the documents. The lower the loan amount the fewer the documents required but its best to have all the documents in case the bank asks for them. However the good news is that most finacial institutions have realised the SME’s are a very big and untapped market and have rolled out facilities for them, this basically means that the requirements are not as stringent as they used to be. Hence it is easier for a small business to get a loan than it was 5 or 10 years ago.
As such it would be wise when you are starting out your business to have a projection of when you might need to scale and as such start preparing early to look for financing. This involves having your books in order, submitting tax returns and ensuring to bank all your proceeds so as to increase the number of transactions in your account among others. Most of all ensure that you are not listed in the Credit Reference Bureau as this automatically disqualifies you from accessing a loan.
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