Do You Know What Are The 10 Key Questions Lenders are Likely To Ask When You Apply For a Small Business Loan?

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Planning to apply for a small business loan?

Jiya runs an online shop that sells handmade home décor items. Now that her business is doing reasonably good, Jiya has decided to apply for a small business loan. She not being a finance-savvy person is already confused with a multitude of business loan options available online. Now she is wondering whether the decision is right to apply for a small business loan idea or look for other financing options.    

This is a common problem of small business owners like Jiya who don’t have the time and knowledge to find and compare different small business loan options and pick up the perfect one for themselves. If you are the one like Jiya planning to apply for a small business loan but don’t want to face the hassles and disappointments, then why not start by asking yourself these 10 simple questions!

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Once you can work out the answers you will realize how super-easy it is to apply for a small business loan for the first time without getting rejected.

Why Do You Need to Apply For A Small Business Loan?

 Oh no, don’t give me that look again! You must be wondering why I am asking such stupid questions but trust me there are so many business owners out there who simply know that they need to apply for a small business loan. Ask them the reason and they might fumble with the answer!

Don’t get lured by a business loan offer because it gets you fast cash. Ask yourself exactly why you need the business loan. Do you need it to purchase a high-performance laptop, to redesign your website, to refinance existing debt or to hire additional stuff? Once the purpose becomes crystal clear, you can work out the debt. And also you can correctly decide the right kind of loan matching your small business requirements.

Tips: If you are planning to refurbish the workplace then consider a commercial property loan. Invoice financing is the best way to get some extra cash to tide over financial crisis which may arise because your customers fail to pay your invoices in time. If you wish to maintain the cash flow during the sluggish business months then look for a business line of credit.

How Much Loan Do You Need To Start A Small Business?

Oh yes, I can almost hear you mutter ‘what a strange question!’ Yes it might sound weird but often the loan applicants ACTUALLY fail to determine the specific amount that they need to borrow for the business. Once you are clear about loan requirements, you can determine whom to approach for the loan.

There are banks, NBFCs, private lenders and non-profit organizations that cater to small business financing. And also,  you can try few Government loan schemes that aim to help small scale businesses. But each of them follow their own set of rules to sanction the business loan. Be prudent in picking up the right option to avoid the loan burden in future.

Tips: Initiate a search like ‘top small business loan providers’ or ‘best small business loans’ in <country-name> and you will be presented with an array of options. There are sites which offer a comprehensive picture by comparing different loan options matching your requirements.

Do You Have A Sound Credit Score?

Guess, now I have your attention! Are you aware of the fact that your business has a credit score which decides its credibility and creditworthiness? This credit score depends on factors like the length of your credit history, credit utilization rate, repayment history, and outstanding debts with credit institutions. Also taken into account the size and life of your business and whether it belongs to any high-risk industry.

Based on your business credit score, the lender decides your ability to repay the business loan in time. Then again these restrictions might vary which means a particular lending company may decide to verify the creditworthiness by some other means without checking the credit score. Yet it is always a safe bet to work on your business credit score before moving the loan application.

Tips: Wondering how to check the credit score of your business? There are several online platforms that offer this service for free. However, it is always advised to go for the trusted one. But before that verify with your bank/private lender whether they need a credit report; and from whom.

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Do You Have A Business Plan Ready To Apply For A Small Business Loan?

 The banker might be your close acquaintance or the lender your close friend but when it comes to a small business loan application they all follow the rule-book i.e. they want a well-drafted business plan that clearly defines your financial goals.

  • Let’s check out the kind of information a perfect business plan should reveal:-
  • The mission and vision of your business;
  • Background info about the owner, management team and key employees;
  • Products/services you sell and the business USP (unique selling proposition);
  • Competitor information and the target market;
  • Financial estimation for the next 3 to 5 years;
  • Some details about the office infrastructure and facilities;
  • The Marketing strategy
  • And finally an executive summary covering other relevant points that you feel worth mentioning.

Tips: As a small business owner, you must be aiming to offer value to your customers with unique product/service. Your business plan should project it clearly to convince the lenders. And finally, remember a business plan is not an accumulation of data and statistics, rather it is a portrayal of your dreams and vision. You can keep it short, simple and precise. Draw inspiration from sample business plans available for free online.

Do You Have Necessary Business License To Set Up An Online Store?

This is one criterion that banks and many lending institutions impose on those looking to apply for a small business loan. What most lenders want to see is that you are indeed the owner of the business and operating in a lawful manner. The business license rules usually vary for different countries and states. If you are not aware of the exact business license requirements of your particular business domain and the state you are operating from then you should seek help of a business/tax consult.

Tips: Planning to start an e-commerce portal? Then it is mandatory to get your Company / LLP registered along with VAT registration. You also need to open a current bank account and apply for a payment gateway. On the other hand those offering online services like web designing, logo designing, content writing, etc. can simply start with a service tax registration provided they offer taxable services of over 10 lakhs in a year. There are many online portals that can assist in acquiring necessary registration for your online business.

Can You Offer A Collateral To Secure The Small Business Loan?

The lenders want to know if you are willing to show any property which they can sell in case you fail to repay the business loan in time. Sounds scary, huh? It is indeed! But with a collateral to show, you will find yourself in a better position to apply for a small business loan and negotiate the terms too. The collateral doesn’t need to be your own house, but it can be a valuable machinery//equipment or your small business inventory.

Tips: If you are not ready to offer a collateral then look for alternate lending options, beyond banks and the big lending institutions. There are private lenders and online portals that arrange collateral-free business loans. Even they have their own set of criteria which you need to meet. Read the fine lines and do own research before applying for collateral-free business loans, otherwise there is high chance you might end up paying exorbitantly high interest on the loan amount.

Are You Ready With The Basic Business Financial Statements?

 I know this is one tricky question which invariably leads to many other questions like ‘What about those businesses which are just starting off and need a business loan?” or “What about new businesses that are not yet profitable?” The answer is, it depends on whom you are approaching for the business loan.

Typically banks and big lending institutions ask for business financial statements from the previous two years that reflect the revenue & expenses and cash flow of the company. Audited Balance sheet is another mandatory requirement. And yes, they prefer to deal with profitable businesses only. Then there are lenders who are not so particular about profit but they want to see that the business has generated a minimum revenue. Then there’s the third category which is not so fastidious about revenue but they want some proof that your small business is indeed on a high-growth trajectory.

Tips: Even if your business financial statements are not ready, make sure your bank account statement is properly updated and ready to produce as a proof of your company credibility. The bank statement gives your lenders an idea of how good you are in managing business cash and the overall operation. Definitely it’s the easiest and fastest way to gain trust of your lenders. Don’t have a separate business account? Open it right now before you apply for a small business loan!

Can you show the lender your personal and business tax returns for last 2-3 years?

If you have just started and planning to apply for a small business loan but don’t produce any of the essential financial statements, then your personal and business tax returns can be of immense helpGenerally lending companies want to check the last two-three years tax returns.

Tips: If you are running a sole proprietorship or partnership firm then the personal tax return will serve the purpose. However for bigger business setups and Limited Liability Companies a business tax return is mandatory.

Have you already taken other business loans? Are you paying these in time?

The question says it all, isn’t it! Small business lenders are actually quite fussy about approving new business loans to those who are yet to settle their previous loans. Quite naturally the lending company worries about a small business owner’s ability to repay multiple loans.  There can be exceptions though, e.g. if you can show them your business has reached a significant milestone after taking the first loan, then the lender may favorably consider a second loan.

Tips: Keep a close watch on your business debt. It’s a great idea to maintain a business debt schedule which includes information like the creditor/lender name, the original debt amount, interest rate, the balance at present, monthly installment, due and maturity dates and collateral details. 

Are you ready with necessary legal documents?

If you or your partner has already entered into a legal contract/agreement with suppliers or third parties then keep those documents ready before you apply for a small business loan. There’s high probability that the lender may ask for necessary legal documents related to your business. These are the most common legal documents that are needed to be furnished to apply for a small business loan:-

  • Third party agreement
  • Contract with suppliers
  • A partnership agreement
  • Franchise contract
  • Purchase agreement with concerned parties (if the loan is meant to purchase office equipment/machinery or real estate)
  • Sales agreement with concerned parties and relevant information (if the loan is meant to purchase a new business)

And finally, your lender might want to verify you are indeed running a small business. Sometimes they ask for payroll records of past 6 months to know your employee strength and gauge the operating costs of your small business. So before you proceed to apply for a small business loan, keep these records handy too.

Conclusion

Have you tried to apply for a small business loan and failed? Which of the above questions do you find most difficult to answer? Do share your views.

If you are interested in any sort of business collaboration with OnliSmallbiZ then simply fill up the contact form to connect with us immediately!