Loans finance future for business hopefuls

by Matt Doran

MCT Campus
MCT Campus

It was 1941 in the Swiss Alps. An engineer was on a hunting trip with his dog. When he returned from his hunt and sat down to marvel at the Ricola-esque landscape, he noticed burdock seeds clinging to his clothes and his dog’s fur. He took these seeds and examined them latching onto other surfaces under a microscope.

He saw hundreds of tiny hooks that latched onto anything with tiny loops (clothing, fur, hair, etc.). He then had the idea of replicating this process for practical applications. Thus, Velcro was born.

Georges de Mestral clearly had a brilliant idea that would make him famous and extraordinarily wealthy, but how did Velcro become the fastening giant it is today?

De Mestral launched his idea with the help of a business loan.

Business loans are the lifeblood of the American entrepreneurial spirit. The successes of monolithic conglomerates such as Apple and Starbucks as well as those of small, local businesses would not have been possible without a business loan.

Entrepreneurs who wish to start a business need an initial injection of money to launch their business off the ground. There are vast, often unknown or unforeseen expenses that go along with starting a business, and for those without trust funds, these expenses can mount quickly and threaten to quash entrepreneurs’ dreams before they are realized.

The first thing prospective business owners must ponder is how their application will appear to lenders. According to the U.S. Small Business Administration, there are a few specific factors that make a business look potentially successful. First, if a borrower has equity investment — a substantial amount already invested into their business — a lender will be more willing to supply funds. Second, borrowers need to be mindful of their business’s debt-to-worth ratio. This is the amount of money being asked for in comparison to how much has already been invested in a company. Clearly, the better the ratio, the more likely it is the loan will be approved.

Next, borrowers need to be prepared to supply a cash flow projection, an estimate of when their business will begin to profit, combined with a schedule of when business expenses need to be paid. This projection gives lenders an idea of how likely it is their investment will be returned with the accrued interest.

If possible, businesses looking for a loan should have a positive working capital. In other words, the business’s current assets or actual cash should be greater than its debt or financial liabilities. For start-up companies, some of these figures would be impossible to show, and although they significantly help the chances of obtaining a loan, there are other ways for entrepreneurs to show their worthiness of borrowing.

A strong business plan can prove a young organization is deserving of a loan, however, they are not simple to formulate. According to sba.gov, every plan should include a detailed description of the business, a marketing and managing plan, and financial projections. Prospective borrowers must also show they are capable of managing their organization’s operations and finances. Borrowers must not forget to consider their business risks and how the given industry they are attempting to enter is doing. Finally, they need to determine how much they need and when they need it by.

After borrowers understand and examine all of these factors, they must compile a hefty amount of documents. These may include, but are not limited to, the owner’s background information, résumé, business license, income tax returns and personal financial statements throughout the course of the previous fiscal year. A collateral document is another necessary key in receiving a loan. This is a list of properties that can be sold to pay back a lender, should the borrowers be lacking cash flow.

Preparing to take out a business loan is a long and daunting process, but luckily, many organizations provide support and opportunities for small businesses. Loans from the SBA are specifically meant for companies that might not be able to acquire normal bank loans. Accion San Diego is another organization of this type. They attempt to stimulate businesses through loans based on borrowers’ projected commitment to their organization.

Many other small business resources exist. However, entrepreneurs must be prepared, knowledgeable and committed before even hoping to obtain a loan. Although they cannot guarantee success, these measures ensure great minds at least a chance to create their own empires following the vision of de Mestral himself.