The basic principles of evaluating financiers (both banks and alternative) in lending to small and medium enterprises are mostly similar. In this article, we've used Capitalia's more than 15 years of experience in business loan financing to provide business leaders with practical advice and homework on how to improve their chances of getting financing and secure the best loan terms.
Tip 1: Check your and the company's credit history
In case the company is small and/or recently founded, the financier will pay more attention to the credit history of the company and the potential loan originator. If time allows, it is recommended to get your personal credit history in order before applying for company financing . Often, private individuals may have an unpaid parking debt or late payment balance from last year without even knowing it. You can check your credit history and active overdue payments once a year for free at www.manakreditvesture.lv/. On this website, it is possible to see both existing and historical debts that a private person has had.
You can check your company's credit history in publicly available databases such as Lursoft, Creditinfo and others. On the other hand, tax debt, both current and historical records, can be viewed on the SRS website. It is important to remember that the financiers look at the absence of current overdue debts, as well as evaluate whether the company has had historical records in recent years that would indicate business difficulties. The existence of historical or current debts is mostly not a disqualifying criterion for receiving financing from a credit institution, but it is immediately important to think about how to explain to the lender why such debts have arisen.
If you managed another company that went bankrupt or was liquidated before starting the operation of this company, take into account that the credit institution will also be interested in the operational experience of the liquidated company and the reasons for the liquidation. It is important to find explanations for previous problems and justify what arrangements have been made so that such a situation does not happen again with the existing company.
Tip 2: Make sure the company's finances are transparent
When approaching a financier, the company's data must be understandable and relevant to the specific business activity. There are several aspects that often appear in the accounting data of companies and disqualify the company from receiving a loan . Here are some of the transaction types that reduce the transparency of the company's operations:
Tip 1: Check your and the company's credit history
In case the company is small and/or recently founded, the financier will pay more attention to the credit history of the company and the potential loan originator. If time allows, it is recommended to get your personal credit history in order before applying for company financing . Often, private individuals may have an unpaid parking debt or late payment balance from last year without even knowing it. You can check your credit history and active overdue payments once a year for free at www.manakreditvesture.lv/. On this website, it is possible to see both existing and historical debts that a private person has had.
You can check your company's credit history in publicly available databases such as Lursoft, Creditinfo and others. On the other hand, tax debt, both current and historical records, can be viewed on the SRS website. It is important to remember that the financiers look at the absence of current overdue debts, as well as evaluate whether the company has had historical records in recent years that would indicate business difficulties. The existence of historical or current debts is mostly not a disqualifying criterion for receiving financing from a credit institution, but it is immediately important to think about how to explain to the lender why such debts have arisen.
If you managed another company that went bankrupt or was liquidated before starting the operation of this company, take into account that the credit institution will also be interested in the operational experience of the liquidated company and the reasons for the liquidation. It is important to find explanations for previous problems and justify what arrangements have been made so that such a situation does not happen again with the existing company.
Tip 2: Make sure the company's finances are transparent
When approaching a financier, the company's data must be understandable and relevant to the specific business activity. There are several aspects that often appear in the accounting data of companies and disqualify the company from receiving a loan . Here are some of the transaction types that reduce the transparency of the company's operations:
- Frequent mutual settlements ( loans , advances) with the owner or manager of the company, as well as related companies;
- Amount of accounts receivable or inventory below industry averages (indicates that inventory and write-offs may not be performed regularly);
- A disproportionate amount of "cash on hand" for the business (most likely indicates that cash transactions are taking place in the business).
Ideally, the company does not have any of these characteristics when it applies for funding . To be sure, it's helpful for a business manager to go over such items carefully with their accountant and, if they spot a potential problem, create a plan to fix or mitigate it.
Tip 3: Know what you want
Before applying for a loan , it is important to clearly understand how much money you need and how you will use it. First of all, such information is important for the head of the company to make sure that the attraction of financing will achieve a positive benefit in business development. Respectively, the manager needs to be able to formulate the benefit of attracting financing and be sure that it comfortably exceeds the cost of financing. Also, the company must have a specific plan on what sources and in what term the loan will be repaid. The purpose of the financing and the type/term of repayment will be among the first questions a potential lender will ask.
Tip 4: Prepare up-to-date financial data
In order to make a decision on granting a loan, financial institutions want to get acquainted with the company's financial data. The previous year's report is usually publicly available, but for fresher information, creditors also require operative financial data, preferably no older than 3 months. To speed up the financing evaluation process, we recommend that you prepare operational data in time before applying for a loan , as well as inform the company's accountant that the potential creditor may have additional questions. Alternative financiers tend to be more lenient than banks and require less documentation for evaluation, however, for larger amounts, alternative financial institutions will also ask for more detailed transcripts of fixed assets, debtors or creditors.
The financier may also ask to see the account statement of the company and the potential guarantor to ensure cash flow and regularity of payments. In order not to delay this process, we recommend that you identify in advance all existing or closed bank accounts of the company where any activity has taken place in the last 12 months. By submitting all accounts at the same time, the company itself will accelerate the pace of evaluation. Commercial banks have access to such information themselves, so they will not request account statements.
Tip 5: Know what kind of financing would be the most suitable for the specific situation
Basically, if the company needs additional funds, they turn to banks. In most cases, it is also the most suitable instrument for meeting the financing need. Bank loans are the cheapest and best solution for financing long-term (3 years and more) projects, such as the purchase of basic equipment, real estate construction or a credit line. Although the bank loan is the cheapest, it is also the most demanding in terms of collateral as well as analysis of the funding allocation. To some extent, this is understandable, as banks want to have a good understanding of the business that they will help with financing in the long term.
In situations where financing is needed for a relatively shorter period (up to 3 years), more quickly or in addition to the already granted bank loan, more and more companies are using the opportunities provided by alternative financiers. Loans from companies such as Capitalia can be used as a simple supplement to the options provided by banks or in situations where bank financing is not available or suitable. Although funds from alternative financing are usually more expensive, they are more flexible and easier to obtain.
Bonus tip: Be bold
Latvian entrepreneurs are often criticized for their lack of ambition and desire to grow, compared to their Estonian and Lithuanian neighbors. Perhaps this is partly true and we like conservative piety. However, we invite entrepreneurs to remember that with business growth comes a series of positive emotions - you can afford to work more modernly, more professionally, hire top-class specialists, get to know and conquer new markets. Of course, any growth must be considered and the costs of such progress (such as financing costs) must be convincingly covered by the benefits (additional profits). As financiers, we stand for this, encouraging entrepreneurs to grow thoughtfully, attracting additional funds if necessary.
It's great when a company sees you grow your business using your own funds. However, if additional capital is needed for growth, both banks and alternative financiers are ready to provide it. To improve your chances of attracting additional funds, we have provided five simple tips. May you succeed in achieving your goals!
Tip 3: Know what you want
Before applying for a loan , it is important to clearly understand how much money you need and how you will use it. First of all, such information is important for the head of the company to make sure that the attraction of financing will achieve a positive benefit in business development. Respectively, the manager needs to be able to formulate the benefit of attracting financing and be sure that it comfortably exceeds the cost of financing. Also, the company must have a specific plan on what sources and in what term the loan will be repaid. The purpose of the financing and the type/term of repayment will be among the first questions a potential lender will ask.
Tip 4: Prepare up-to-date financial data
In order to make a decision on granting a loan, financial institutions want to get acquainted with the company's financial data. The previous year's report is usually publicly available, but for fresher information, creditors also require operative financial data, preferably no older than 3 months. To speed up the financing evaluation process, we recommend that you prepare operational data in time before applying for a loan , as well as inform the company's accountant that the potential creditor may have additional questions. Alternative financiers tend to be more lenient than banks and require less documentation for evaluation, however, for larger amounts, alternative financial institutions will also ask for more detailed transcripts of fixed assets, debtors or creditors.
The financier may also ask to see the account statement of the company and the potential guarantor to ensure cash flow and regularity of payments. In order not to delay this process, we recommend that you identify in advance all existing or closed bank accounts of the company where any activity has taken place in the last 12 months. By submitting all accounts at the same time, the company itself will accelerate the pace of evaluation. Commercial banks have access to such information themselves, so they will not request account statements.
Tip 5: Know what kind of financing would be the most suitable for the specific situation
Basically, if the company needs additional funds, they turn to banks. In most cases, it is also the most suitable instrument for meeting the financing need. Bank loans are the cheapest and best solution for financing long-term (3 years and more) projects, such as the purchase of basic equipment, real estate construction or a credit line. Although the bank loan is the cheapest, it is also the most demanding in terms of collateral as well as analysis of the funding allocation. To some extent, this is understandable, as banks want to have a good understanding of the business that they will help with financing in the long term.
In situations where financing is needed for a relatively shorter period (up to 3 years), more quickly or in addition to the already granted bank loan, more and more companies are using the opportunities provided by alternative financiers. Loans from companies such as Capitalia can be used as a simple supplement to the options provided by banks or in situations where bank financing is not available or suitable. Although funds from alternative financing are usually more expensive, they are more flexible and easier to obtain.
Bonus tip: Be bold
Latvian entrepreneurs are often criticized for their lack of ambition and desire to grow, compared to their Estonian and Lithuanian neighbors. Perhaps this is partly true and we like conservative piety. However, we invite entrepreneurs to remember that with business growth comes a series of positive emotions - you can afford to work more modernly, more professionally, hire top-class specialists, get to know and conquer new markets. Of course, any growth must be considered and the costs of such progress (such as financing costs) must be convincingly covered by the benefits (additional profits). As financiers, we stand for this, encouraging entrepreneurs to grow thoughtfully, attracting additional funds if necessary.
It's great when a company sees you grow your business using your own funds. However, if additional capital is needed for growth, both banks and alternative financiers are ready to provide it. To improve your chances of attracting additional funds, we have provided five simple tips. May you succeed in achieving your goals!