5 Questions You’ll Need to Answer to Be Approved for a Business Loan
Business loans are a bit different, however. Because they are usually for a much higher amount of money ($50,000 vs. $5,000), the bank has to work a bit harder to ensure that they are taking an appropriate risk with lending you cash. Whether you are looking to get a secured loan (using your home or business assets as collateral) or you hope to get a no-risk line, the documentation you provide will be very important. Credit history – both personal and business – are important, but your responses to some often very open-ended questions will be essential.
Here are the most common questions asked by lenders for business loans, and how you should prepare to answer each.
1. How old is your business?
Most SBA (Small Business Administration) loans require a 2-3 history with your given company, but some larger, unsecured loans may need five years of business success to qualify you. Have a record of your business incorporation, DBA, and other documents that show when you started your business and that continue to prove you’re still in business today. Have a startup? You’re not disqualified from all lending, but you’ll have to apply for money specifically for your young endeavor. Look for microloans or startup loans that cater to newbie businesses. They are small in dollars, but more lenient for breakout startups.
2. How much are you making?
Profit is possibly the most telling sign of a businesses’ health, especially if you’ve passed the five-year mark and have established yourself in the marketplace. If you’ve shown declining profits, are suffering from major cash flow issues, or have a downward trend in your overall business health, expect your loan application to be a tough sell. While you don’t have to make an amazing amount of money, banks like to see you making progress. Note the “profit” is going to be different than “revenue.” Both are essential, but revenue may not cover the needs of the business and may not be enough to convey your ability to repay a loan. Tax documents can be vital in differentiating between these concepts. Have you last five years’ forms available for the lending company to see if they ask.
3. What are your debts and assets?
Banks like to see that you have a healthy variety of assets that could be sold – if needed – to cover any loans. Even if they don’t require to put up any of your assets directly as collateral (which is quite common for business loans or a large amount), they need to know that your company isn’t upside down. While loans could be used to organize or consolidate debt, banks aren’t in the business of saving failing companies. If you owe much more than the value of your business, this will be a very hard sell. Come prepared with a list of your assets and debts; don’t forget outstanding invoices as these could be considered “assets” as potential cash flow down the road.
4. What is the purpose of the loan?
Unlike many personal loans and credit accounts, banks like to see what their funds will be used to do. Are you hoping to expand operations with new real estate? Do you need updated equipment? Is there a new launch coming up that can benefit from a marketing push? By stating specifically what you hope the money will be used for, you can ensure that you have a clear plan of action and that you are serious about borrowing. Banks want to see that you don’t just have an initial business plan for your company; they need to see an ongoing understanding of your path to profitability. By detailing exactly what you will purchase with the loan, you are demonstrating an understanding of business growth.
This also gives the bank a way to follow-up, which may be a condition of the loan itself. Also, remember that many secured loans can be obtained by putting the very thing you’re buying up as collateral. If you plan on buying new stoves for your restaurant with loan proceeds, these very stoves can be the security you need to get approved. If you didn’t specify this, the bank might not have the assurance that they will be repaid. The more info you can provide, the better!
5. Why have you chosen our bank?
While this last question isn’t required to determine your credit-worthiness, it can earn you bonus points. Lenders love to reward loyalty, and if you already have loans or accounts with a bank, your chances of getting approved may increase. Your kind words alone won’t be the difference maker, but the process of answering this question is vital. Knowing why you have chosen a lender is recommended before you ever apply. Do you love their terms? Their relationship with similar businesses? A specific loan product? Get a handle on why you want to borrow from your preferred bank, and know the perks before you apply.
Be Prepared for Other Questions
This is not an exhaustive list. Get ready to answer any question about your business that may be of interest to the lending company. For a full list of the things banks may ask for, check out this resource from the SBA. Have these with you when you apply, and ensure your preparedness for anything they may throw at you!
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