When starting any business, every entrepreneur asks: "Where can I get the money?" Without answering this question, starting a business is practically impossible. Many people use their savings or borrow from friends to start a manufacturing business. However, if you do not have enough money to buy a turnkey business or equipment but would really like to open a small plant, do not give up.
Some of our partners take out loans to purchase a turnkey business. In this article, we will look at several important details to consider.
Since the investment required to open a plant producing innovative materials ranges from RUB 600,000 to RUB 3 million, you can take out either a business loan or a standard personal consumer loan for this amount.
This article examines both ways of obtaining a loan.
METHOD 1. OBTAINING A LOAN FOR AN LLC OR SOLE PROPRIETORSHIP
When applying for a business loan, several key factors must be considered:
Banks are fairly conservative and are not ready to take risks. Therefore, they rarely provide funds to start a business. Even obtaining a loan to develop an existing business can be difficult.
Banks have a number of standard requirements designed to reduce the risk that a loan will not be repaid.
An Operating LLC or Sole Proprietorship
First, you must already have a legal entity (LLC) or sole proprietorship that has been operating for at least six months. This is important because banks are cautious about newly established legal entities and entities that have recently changed owners, such as a purchased ready-made LLC. They may refuse a loan application on this basis alone.
Monthly Turnover
It helps if the LLC or sole proprietorship already has monthly turnover and enough profit to cover the monthly loan payments. For example, monthly profit may be RUB 200,000, while the loan terms require monthly payments of about RUB 50,000. In this case, it is best to apply to the bank where your legal entity or sole proprietorship has an account. The bank can see your monthly turnover, assess your creditworthiness, and make a positive decision more quickly.
Positive Credit History
All banks prefer stable and reliable borrowers. The best situation is when you have previously taken out loans for this LLC or sole proprietorship and repaid them without delays or arrears. The more loans you have already taken and repaid, the better. In this situation, almost any bank is highly likely to approve a loan.
Real Estate or a Vehicle as Collateral
If none of the above applies, some banks may issue a loan against collateral. A vehicle or real estate is often used as collateral. This is not a whim on the bank's part; collateral protects the bank against the risk of non-payment. Therefore, if you have an asset that can be pledged and are ready to do so, your chances of obtaining a loan increase substantially.
Guarantor
Some banks may also ask you to find a guarantor, such as an acquaintance, friend, relative, or entrepreneur whose monthly income substantially exceeds the monthly loan payments. If this person or company agrees to guarantee the loan, your chances of obtaining it will increase significantly.
These are the main factors that strongly influence a bank's decision. The more of them you can demonstrate, the greater your chances of receiving a positive loan decision.
Do not stop after a single attempt. Nine out of ten banks may refuse, while one may give a positive answer. Each bank has its own approach to lending, so there is always a chance of success.
If you do not have a legal entity or sole proprietorship and none of these options suits you, do not give up. There are several other options, which may be even more reliable.
METHOD 2. OBTAINING A PERSONAL LOAN
The previous section explained how to obtain a loan for an LLC or sole proprietorship. If that option is not suitable for some reason, there is another way:
The second, and possibly more reliable, option is to take out a loan in your own name as an individual.
Since the investment required to open a plant producing innovative building materials ranges from RUB 600,000 to RUB 3 million, you can take out a standard consumer loan for this amount.
A consumer loan is much easier to obtain than a business loan
Banks are currently more willing to issue consumer loans than business loans. There are far fewer requirements, and banks make decisions more quickly.
Consumer loans are issued for amounts of up to several million rubles and terms of up to six years.
A bank will issue a loan if your personal income can easily cover the monthly payments. However, that is not the only factor.
The bank also takes your monthly expenses into account.
Therefore, a loan application will ask whether you:
- have children;
- rent an apartment or live in your own home;
- pay for housing;
- have other loans;
- make loan payments;
- own real estate or a vehicle;
- have sources of income in addition to your primary income, and so on.
It is important to understand that the bank wants to calculate your financial burden in advance: your monthly expenses and how much money remains available for loan payments.
Your total mandatory monthly payments should not exceed 80% of your monthly income.
The general logic is that if your financial burden, including the planned loan, does not exceed 80% of your monthly income, you will most likely receive the loan.
For example, suppose you want to open a GFRP rebar plant with a mid-range equipment package and a modest start-up capital. You would need a loan of approximately RUB 1.2 million.
To minimize your financial burden, it is advisable to request the longest possible loan term, usually up to six years.
The monthly payment in this case would be approximately RUB 26,000.
If you rent an apartment and pay RUB 20,000 per month, this amount is added to your financial burden.
If you have credit cards or other loans, the minimum monthly payments on them are also added to your financial burden.
Suppose you have two credit cards.
One has a credit limit of RUB 100,000 and a minimum payment of RUB 7,000. The other has a credit limit of RUB 150,000 and a minimum payment of RUB 12,000.
Regardless of whether you use the credit cards, the bank will calculate your burden as if you use them to their full limits.
Therefore, if you do not use your credit cards, it is better to close them before visiting the bank. This will reduce your financial burden and improve your chances of success.
Your total monthly financial burden is therefore RUB 65,000: RUB 26,000 for the planned loan + RUB 20,000 for housing + RUB 19,000 for credit-card payments.
Based on these figures, to obtain a RUB 1.2 million loan for six years, your monthly income would need to be at least RUB 82,000.
Now that we have established the figures, the next important question is how to prove them to the bank.
To verify your income, the bank requires a 2-NDFL certificate, an official document issued by your employer.
If you are not officially employed or receive unofficial wages, you will not be able to obtain a certificate showing the required income.
In that case, you can use the bank's own income certificate form, which most banks accept.
You can state your actual income on this form. Banks understand that many people receive unofficial wages and may also have additional unofficial income, side jobs, rental income, and so on.
The bank form must be certified by your employer.
If you are not officially employed, you have several options:
- Provide a debit-card statement. If the bank sees that your card turnover is sufficient to cover the loan, it may approve your application.
- Provide a passport containing stamps from your trips. If the bank sees that you travel frequently, it may form an opinion about your income.
- Provide a rental agreement for your property (if applicable).
- Register a sole proprietorship or LLC. Make a company stamp and certify the bank form yourself. However, it is better to wait six months after registering the sole proprietorship or LLC, because a bank will be suspicious of a newly registered organization. Keep in mind that banks generally prefer customers who do not hold executive positions. Therefore, the best option may be to arrange a certificate for a friend's or acquaintance's sole proprietorship or LLC.
It is important to understand that the bank wants to reduce its risks. If you can pledge real estate or a vehicle as collateral, the bank is more likely to approve your loan and may offer more favorable terms, such as a lower interest rate or a longer term.
Also remember that a refusal from one bank does not mean another will refuse. It is best to apply to every bank available in your region until you receive approval.
Remember: banks are not the only financial institutions where you can find money to launch an innovative business.
WHERE ELSE CAN YOU FIND FUNDING?
If banks refuse your application, do not worry. Other financial institutions are ready to help launch a modern innovative business.
The equipment needed to launch a business (which accounts for 80%–90% of all expenses) can be purchased through leasing.
You can recover part of your start-up costs or receive financial assistance through government support programs for small-business development and innovative entrepreneurship. Different regions often create their own support programs, so it is worth considering not only federal programs but also programs offered by the relevant regional government.
