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10 Questions to Ask Before Applying for a Bank Loan
Many small-business owners require a bank loan at the same time or another, and applying for one involves a lot more than filling out paperwork and saying a prayer. Among other items, you need to think about the state of your personal and business finances, how you are going to repay the loan, and how much money you actually need.
Listed below are a Few of the key questions you should ask before beginning an application:
Is it likely I'll qualify for the loan?
You're only going to hurt your credit if you submit an application for a loan that you won't get. "Just like in the event that you get declined for a personal credit card, then it makes it more difficult to borrow in the future," states David Gass, a business consultant and trainer in Meridian, Idaho. "If you get turned down, then it seems to another bank just like you are a terrible risk." He proposes asking lending associations about their particular requirements prior to implementing. Many will let you know the minimum credit rating they need, the cash flow you want to reveal, and other qualifying factors.
How much do I really want?
Before you approach the bank, be sure to have a good deal on how much cash you truly need. The best way to determine this is to create a monthly cash-flow projection. Does your customer pay you 60 days, but you have to pay your vendors in 15 days? If that's the case, you may need additional money to tide you over. "It will reflect poorly on you in the event that you come into the bank asking for $50,000, they then ask you to make a cash-flow projection and you also determine that you truly want $100,000," says Adam Hoeksema, co-founder of Muncie, Ind.-based ProjectionHub, an Internet program to help entrepreneurs make financial projections. "You ought to be aware of how much you need and how you are going to utilize the funds before approaching the lender."
How much can I borrow based on the asset I'm using for security?
Business owners often think if they purchase a piece of gear for $100,000, they should have the ability to borrow $100,000 by pledging the equipment as security. But banks usually don't agree, Hoeksema says. "Banks will value your advantage below what you believe the value should be, and then they will only add up to a specific proportion of the value of the asset." For instance, banks might lend up to 70 percent of the worth of a new item of gear, and maybe only 60 percent to get a used piece of gear.
Can I have adequate cash flow to repay the loan?
Your banker will likely ask you to provide financial projections for the small business. Make certain that you include your own debt repayment strategy in those projections. Bankers are going to be looking for businesses that have some wiggle room, and you might need to reveal available cash flow that's three times greater than your debt payment conditions, Hoeksema says. "They do not want to see whether you lose one client, you won't have the ability to create your loan payment this month. If your projections reveal that you have hardly any room for error, you are very likely to frighten them away."
Will the money help my business grow?
If you are borrowing $10,000 for payroll or other routine operating expenses, you're not creating more revenue from the loan and may end up in the same place three to six months from now. Instead, you must put borrowed dollars into the parts of the company that will generate more earnings over time and reduce future borrowing needs, Gass states. "Should I take that buck and leverage it, put it into sales and marketing and drive more revenues -- $1 driving $5 -- then it's worth it. It is all about developing the business."
How good is my business credit score?
Many men and women know their personal credit score, however, very few understand their business score, says Rohit Arora, CEO and co-founder of Biz2credit, a New York-based business that arranges loans for smaller businesses. As with private credit, you can find your business credit score through Experian, Transunion or Equifax. If the score isn't as large as you think it must be, it may be because you will find outstanding liens against your enterprise. Additionally, check to be certain your vendors are reporting your payments. You can attempt to boost your score by reducing the balance on your business credit cards or requesting a credit-line increase to lower the proportion of your available credit being used. "The creditor will look at your small business, and your score is the final arbiter of whether you have the loan or not," Arora says. "Even in the event that you have stellar personal credit and good assets, if a lot of company contacts are saying you're paying them late, that's likely to scare off lenders."
Are my personal finances in order?
Bankers might want to check out your own"global financial statement," including private information like outstanding student loans, personal credit card debt and mortgage obligations. Until your business reaches a substantial size ($5 million to $10 million in yearly revenue or more), the lender is going to rely heavily on your own personal financial statement and private credit rating to determine the creditworthiness of your small business. "If you have a $200,000 mortgage on a house worth $250,000, and you have $200,000 in student loans, the bank may not see you as a fantastic candidate for a loan," Hoeksema says. "If you've got a lot of private debt and very little security which it is possible to provide to the bank, you might need to discover a powerful co-signer."
Can I have all of the documentation I want to apply for the loan?
Arora says a few studies have demonstrated that as many as four loans never close --"since the business did not qualify, but because of the paper chase." When searching for a business loan, you will require a good deal of documentation. By way of instance if you are seeking a Small Business Administration loan, Arora urges you provide the last three years of company and personal tax returns, personal financial statements and financial projections for the next 12 to 24 weeks. "If you go to the [creditor ] and are not entirely prepared, not only does it make you look unprofessional, but by the time you receive the documentation in place, it may be outdated," he states.
Does the loan have a prepayment penalty?
When you take a loan, find out if you're free to pay it off early with no penalty. Some states make it possible for lenders to charge prepayment penalties, in which case you should try and negotiate a compromise. For example, you may agree to a penalty only in the event that you pay off the loan at a relatively short period of time, say, within six months from the time of their loan. "Prepayment is particularly valuable if you believe your company may grow soon, and you may require a bigger line of credit," says Jeanne Brutman, a New York-based financial planner for small-business owners. "By having good surplus cash and a paid-off or [paid-down] line of credit, it shows the creditor you're liable with debt and will take care of an increase in your total credit."
If I die, how will the loan be paid back?
It's something most people don't like to think about, however in the case of your death, an outstanding business loan can influence your loved ones. "Many people think, if I die, the bank is out of luck, but that's not true," Brutman says. Should you leave a huge life insurance policy, for example, the bank may come after that. Learn what a lender's coverage is in the event of your death to best determine how to secure your loved ones. "Most business owners understand that should they're collateralizing their house and the business fails, they could lose their property," Brutman states. "But they may not understand that should they die, it will not cancel out of their debts." It can be best to put your assets in your spouse's name, if the partner does not have an ownership stake in the company. Brutman also urges personal property and casualty insurance policy, which in the event of your death, takes business debt into account.