St. John’s Antigua- Getting a loan for your business is not a simple proposition. There are many types of loans, and many criteria that go into evaluating how much you can borrow and what you can expect to pay. There are several lenders to pick from, and each one may have a slightly different proposition to suggest.
When you’re in the market for a loan, it’s smart to do some homework and figure out where you fit. It’s also smart to hear several opinions. That said, once you’ve heard the same thing several times, you probably have a pretty good idea what your prospects are. At that point, you have a decision to make.
First, the loan market is actually pretty competitive. Lenders fight with one another to get different types of loans. There are many advertisements now in the media regarding the loans for residential mortgages ranging from 5.99 per cent to 7.5 per cent.
Unfortunately business loans carry a higher risk than personal mortgages and the rate tends to be higher. There is however some negotiation room in that if the loan is for purchasing or building real estate a lower rate can be obtained, based on the property being available for security.
Another consideration is the type of loan you require. If the money is required for acquiring an asset, a loan with a fixed repayment may be preferable. However, if the funds are for peace of mind and to provide working capital, an overdraft facility or line of credit would be ideal.
A client of mine recently requested an overdraft facility from his bank. That bank having examined his records determined that he did not need an overdraft facility. The client approached another bank and was granted a line of credit. No the client did not need it, but based on his business, there were fluctuations in income and expenses and he wanted the level of comfort the facility would give.
Loan versus Overdraft or Line of Credit – A loan affords you a fixed amount at a time and requires a fixed repayment and interest calculated on the original sum borrowed. An overdraft facility and line of credit are similar in that a limit is set and you are able to access funds at any time once you stay within that limit.
The interest charged is based on the daily balance which will fluctuate according to the deposits made and the funds used. There may actually be periods when the overdraft facility is in a credit and no interest will be charged.
Whatever facility you decide to take the bank will require comfort that it will be repaid. The lenders will more often than not ask for:-
- Business plan and cashflow projections – this will show the funds available to repay the facility as well as the plans the business has to achieve these projections.
- Security – a lien may be taken on real estate or stock in trade. Personal guarantee of the directors of a company may also be required.
- Property tax and insurance on assets over which the bank has a lien. The bank will require proof that the property tax on real estate has been paid and that the insurance policy is in place and lists the bank as a mortgagee.
- If the business is incorporated the bank will require a resolution from the shareholders approving the borrowing.
- The bank may require annual audited financial statements, as well as quarterly or monthly management accounts. If there are changes in the business circumstances the bank may reevaluate the loan facility.
The bank may have other requirements based on what it considers the risks of lending are. For small businesses it is particularly difficult to get financing and agencies such as the Credit Unions, the National Development Foundation, NDF, the Antigua and Barbuda Development Bank, ABDB and the Antigua & Barbuda Investment Authority, ABIA have developed programmes specifically catering to this market.
Some banks as well have a small business unit recognising the role that small businesses are playing within our community.
There is also the government’s loan guarantee scheme being managed by ABDB which guarantees 80 per cent of the loan once you are in possession of an approved small business certificate issued by the ABIA.
More often than not the issue of obtaining financing stems from a lack of records to provide the financial information required by the bank and for the production of the projections.
Do not expect an accountant to pull figures from thin air which will be acceptable to a bank. If you have been banking with this institution for some time they may be willing to lend you the money based on a review of your banking transactions history. This is another reason your accountant will tell you to bank the day’s takings intact and use cheques for all transactions.
No bank is going to lend you money because you promise to pay it back. A promise is a comfort only to a fool.