Securing a small business loan is often easier said than done. Banks aren’t in the business of lending money to just anyone, and before they’ll consider approving your loan request they’re going to want to gather some pretty specific information about you and your business. If you aren’t prepared top provide that information, quickly and concisely, there is a good chance your loan application is going to fall on deaf ears.
So, before you schedule an appointment with your bank’s loan officer let’s look at some of the most common questions you’ll be expected to answer when you apply for a small business loan. Knowing what to expect from the loan interview, and having prepared your answers ahead of time, will help to speed up the application process while improving your chances of securing some much needed funding.
How Much Money Do You Intend to Borrow?
While this may seem like a fairly obvious question, it’s likely to be the first thing your loan officer asks. Banks survive by being conservative when it comes to lending and they will expect that same level of conservatism from their chosen borrowers.
When a lender asks you “how much money you need to borrow” be as specific as possible in your answer. A vague amount will leave the lender wondering if you have a definite plan for the funds or if you are just shooting for pie in the sky. You need to demonstrate that you have carefully calculated your business’ financial needs, and that you are only borrowing the money you need to advance a specific project.
What is the Purpose of the Loan?
Your lender will want you to demonstrate that you have carefully considered the purpose of your loan as well as the amount you intend to borrow. To that end you should come prepared to explain how you intend to spend the bank’s money, and how it will benefit your business and increase the company’s profits so the loan can be repaid in a timely manner. Remember, the loan officer is trying to assess the overall risk of underwriting your loan. Having a definite plan for how you intend to use the funds will go along way to mitigating that risk.
What Will You Use as Collateral?
Banks typically don’t approve small business loans without the borrower pledging some form of collateral to secure the loan. The only exceptions to this rule is if your business has qualified for a Small Business Administration (SBA) Loan, in which case the federal government acts as guarantor for a portion of the loan thus lowering the lender’s inherent risk. Barring that scenario, however, you should expect to pledge some of your business or personal assets as collateral in order to secure your loan.
Collateral for small business loans typically falls into one or more of the following categories:
- Accounts Receivable Financing – The lender accepts a percentage of a company’s outstanding invoices, and/or money owed by customers, as sufficient collateral to back the loan.
- Inventory Financing – The bank accepts a percentage of the business’ inventory as collateral. This is often the case when a loan is being used to purchase new inventory or equipment, with acquisitions acting as collateral to secure the loan.
- Real Estate as Collateral – For smaller businesses with limited collateral options lenders will often look to the owner’s personal assets to guarantee the loan. In many cases the owner’s home or other property holdings can be used as security for a small business loan.
What is Your Business Plan?
We’ve already mentioned that your lender will want to know how you intend to use the money you are borrowing. Beyond that, they will also want to see a definite long-term business plan for the company itself. It doesn’t necessarily have to be an all encompassing business plan, but should be detailed enough that it provides a basic summary of your business, its products and services, market share, employees and financial structure. So, you should definitely be prepared to submit some manner of business plan document along with your initial loan application.
Can We Take a Closer Look at Your Business’ Financial Details?
The answer to this question should always be “yes”; otherwise you can expect your loan application to be denied. Before underwriting any loan lenders are going to want to take an in depth look at the company’s current financial status.
You should be prepared to provide a detailed accounting of the following:
- Past or Current Loans
- Personal and Business Credit Lines
- Any Active Investment Accounts
- Personal and Business Bank Accounts (including information on any joint co-signers or co-owners of the accounts)
- Up-to-Date Tax ID Numbers
Can We Review Your Accounts Receivables and Accounts Payable?
Once again the answer here needs to be “yes”. This is information your loan officer will need to access before they can submit your loan application for final approval. Being able to produce this information upon request, and without delay, will make a better impression on your lender.
Even if you’re not intending to pledge your accounts receivable as collateral to secure your loan the bank still needs to see detailed information on any moneys owed to you by customers or vendors. The loan officer will also want detailed information on each account so that they can check their solvency and credit history. Essentially, your lender needs to confirm that any invoices pending payment are a good risk, and that your debtors have a history of paying their bills in a timely manner.
You should also your lender to review your company’s accounts payable in order to assess your own solvency and payment history. You should be prepared to provide extensive credit references for your business, as well as detailed information on any vendors that sell to your business on account. Your lender will use this information to confirm your business’ credit and payment history to determine if you are a good risk for a small business loan.
Can We Review Your Personal Financial Details?
Finally, your lender will want to see details about your personal finances. As the owner of your business you are ultimately responsible for any debts the company assumes. Naturally, your banker will want to review your own personal financial details in order to assess your risk as a borrower.
Common areas of interest include:
- Net Worth
- Personal Assets (homes, vehicles, investment accounts)
- Liabilities (credit card accounts, outstanding loans, mortgages)
If your business has multiple owners all partners should expect to supply the lender with their personal financial details during the loan application process.
Be Prepared to Be Patient
Applying for a small business loan can be a complicated and time-consuming affair. However, if you enter into negotiations well prepared you can often speed up the process and reach a more favorable result (i.e. the final approval of your loan request). Let preparation and patience be your watchwords.