Understanding what lenders want to know before you apply for a business loan is a good way to prepare for the questions they will ask.
With so many lending options available today, the particular documents or the specific information you may need to gather can vary from lender to lender. However, there are three very important questions you should be prepared to answer no matter where you’re seeking financing.
1. Can you repay a loan?
Lenders may not ask it exactly this way, but when they ask about your time in business, your annual revenues, your profits, or your cash flow, they’re trying to determine if you have the means to make regular payments. This is why it’s so difficult for early-stage businesses that aren’t generating regular income or revenues to qualify for a loan.
While a good business plan is important, lenders are more interested in whether or not your business has the cash flow to make the loan payments. No revenue or no cash flow usually means no loan.
If you can prove to a lender that you can make regular and timely loan payments, you improve the odds of a successful loan application.
2. Will you repay the loan?
This is a different question than the first and is why many lenders look at your business credit profile as well as your personal credit score when they evaluate your business’s creditworthiness. Based on your track record with other creditors, lenders try to predict whether or not your business can be relied on to make periodic payments.
This is another reason startups and other early-stage companies sometimes struggle to borrow capital. Because they have a very short track record (or maybe none at all), it’s hard for lenders to judge whether or not they will make their loan payments. That’s why it’s so important to start establishing your business credit profile as soon as you start your business.
You can begin to build a strong business credit profile by establishing trade credit with vendors that report to the major commercial credit bureaus—Experian, Dun & Bradstreet, and Equifax—and making your payments on time. Getting a business credit card that reports to the major business credit bureaus and paying your credit card bills on time will also help establish a business credit history.
If you can convince the lender that you can and will repay the loan, you’re more likely to get the loan.
3. Do you have a backup plan?
This is an important question. Many business owners plan to use borrowed capital to fund projects designed to increase revenue and profits. They expect this increase in revenues will give them the cash flow they’ll need to make their loan payments. This may be a reasonable expectation—but it’s not enough to convince a lender.
Unlike an investor, a lender isn’t making an investment in your business. Whether or not the capital they lend you has the desired result, what they care about is whether you can make the loan payments when they’re due. That’s what makes the loan profitable for the lender.
If you can demonstrate you can and will make the loan payments despite any contingencies, you increase the odds of a successful loan application.
Different lenders may have different requirements and ask different specific questions. However, if you can prepare all the information that you’ll need to answer these three questions, you’re more likely to get a small business loan—regardless of the lender.