What to know before taking out a bank loan5 min read
A bank is a company whose main activity is to finance the economy through its public and private companies; like any business, it seeks to minimize its risk-taking and optimize its profitability.
Along with their own commercial requirements, the so-called “Basel III” agreements oblige financial institutions to respect a certain ratio of equity in relation to loans granted to consolidate structures in the event of a new financial crisis.
For these reasons, banks are extremely careful in their risk analysis. They do not generally wish to risk more money in the project than the creator (s) themselves. Likewise, they prefer to share the risks with as many partners as possible to limit the negative effects.
This partly explains why some business creation projects encounter difficulties in obtaining bank financing. These are generally projects:
Finally, it should be noted that each banking establishment has its own criteria for granting or not its financial support to a new business.
As a general rule, it is advisable to balance equity and borrowing at best (50/50). However, the bank can reduce its capital requirement to a ratio of 30% on average (70% debt to 30% equity) or lower when the loan finances a “limited risk” business start-up. after the standards of the sector concerned.
In any event, an absence of equity capital will be deemed prohibitive by the banker responsible for studying the business plan of the company.
The greater the amount of your contributions, the more likely you will be to obtain your loan.
As much as possible, ask your loved ones for a helping hand . There are tax advantages for them!
In addition, there are other financial solutions to supplement your personal contributions . Discover them!
Competition between establishments
It is recommended to compare the different offers of the banks because the terms ( TEG interest rate , repayment term, bond, etc.) may vary from one bank to another. Competition between agencies makes it possible to negotiate better conditions or less restrictive clauses but above all to avoid disappointments when funding is rejected.
Note: loan instruction times can vary from a few days to a few weeks depending on the size of the agency and the level of risk of the project.
If your financing needs are important, why not consider going through a professional financing broker ? For you, it is the assurance of finding one (or more) banks likely to be interested in your project; for banks, it is the assurance of having in hand a file already examined and presentable (therefore considered solid).
Whatever the bank and the nature of the project, the decision to grant a loan is always motivated by concrete elements present in the business plan ( business plan ) but not only. Indeed, a business plan developed for a business creation is always built from more or less credible assumptions. It is essential that these, and more particularly those which target the working capital requirement (WCR) , be as realistic as possible based on documents ( quotes , order commitments, etc.). However, the ability of the manager (s) to manage and develop the business is essential in the choice made by the bank to lend or not the amount necessary for the start-up.
In order to avoid any stress while waiting for the loan allocation decision, ask what will be the processing time of your file during the first interview with your banker.
Also keep in mind that the banker will primarily look at the ability of your business to repay its loan and therefore generate good profitability. You will therefore have to convince him of your ability to achieve this by showing consistency between you and your project.
Diversification of funding sources
As banks increasingly wish to share the risk of financing a business creation project, it is often necessary to find additional resources to finance the project. This may be :
obtaining an honor loan , to supplement your own funds,
the creation of a “banking pool”: several banks finance the same project.
What to do in case of refusal of a bank loan?
The refusal should not be considered as a negative element but as an additional phase of reflection allowing the necessary adjustments to be made. Normally, a bank’s refusal must be motivated and argued.
In case of refusal, contact a support organization to validate your financial assumptions with them and verify the viability of your project.
You should also know that it is always possible to appeal to the Credit Mediation whose mission is to facilitate access to credit for businesses.
How to get a bank loan
Bank loans granted as part of the creation of a business generally extend over a period of between 2 and 7 years. In the case of real estate acquisitions, the loan can be spread over a longer period (15 to 20 years, or even more).
What are they funding?
Although it is difficult to generalize on the practices of banks, we can nevertheless note that they favor the financing of durable goods (vehicles, IT equipment, machine tools, etc.).
They will less easily grant you the capital necessary to finance the activity itself ( working capital requirement ).
When granting a loan, the bank usually requires the creator to provide collateral or his personal surety.
On the acquisition of movable property, the bank generally resorts to collateral to cover its risk of losses. However, these pledges (business assets, equipment and tools, vehicle) are generally not sufficient to cover the entire risk. The project leader is therefore also required to provide a personal guarantee . This is based on the asset declaration of the guarantor (the entrepreneur himself or a third party) depending on the amount borrowed.
Find out about the collateral arrangements that have been put in place to make it easier to obtain a bank loan. Having a good knowledge of it will facilitate your loan application.
2 mistakes to avoid when negotiating your bank loan
Minimize the amount you need to borrow to keep your business running smoothly.
Creators often tend to underestimate their needs in order to limit debt. Do not fall into this trap
Act with haste. Take the time to properly prepare your business creation project . Your presentation file must be complete, precise, clear and neat … in a word “seller”!
Follow the advice of Bpifrance Création to make your business plan and especially prepare the interview with the help of an advisor . Practice “pitching” your project .