Your business is doing well and you are ready to grow. But, your cash flow does not support the expenditures you want to make. So, you need a bank loan. Before you fill out the paperwork here are 6 key questions to ask.
Can I qualify?
Many owners make the mistake of applying to see if they qualify, rather than figuring it out on their own. They want the bank to do the due diligence they should be doing. It is important to find out if you have a chance of qualifying for the loan before you apply.
Talk to the bank(s) and make sure you meet all the requirements. If you apply and get turned down it can hurt your credit. It also gives the impression you are a bad risk and may make it harder to borrow next time you try.
How much do I really need and how will it help?
Specifics, specifics, specifics – the more the better. How much cash do you actually need and how is it going to drive growth? Be ready to show the math, guesses do not count. Banks want to clearly see how you will leverage the money to increase revenue. They routinely turn down loans for operations which only support the status quo, rather than growth. Is the borrowed $1 driving $1 or is it driving $5?
What documents do I need?
This is a no-brainer, and yet it has been estimated that 3 in 5 loans never close because the business owners did not do all the paperwork. It is simple – find out what documents you need and have them ready before you apply.
What is my collateral really worth?
Owners are notorious for overestimating the worth of the business’s assets. They are shocked when the bank values them for much less. Find out what the bank’s guidelines are and adjust your request accordingly. Here is an example.
You want a loan for a $50,000 piece of equipment. You plan on borrowing the $50,000 using the equipment as collateral. But, the bank’s formula only allows lending on 65% of the value of the asset. How you are going to make up the $17,500 short fall, when the bank just offers you a $32,500 loan?
What is my repayment plan?
If you do not understand your financials (i.e. margins, revenue, profit and loss, cash flow) now is the time to learn. The bank wants to know how you plan to give them their money back. Good intentions, hopes and dreams do not count here.
Do the financial projection ahead of time, and in the format they want. Many banks focus on the monthly cash flow projections for loan repayment information. One of the standards is that your monthly cash flow should be 3 times greater than your monthly debt repayments.
How good are my personal and business credit scores? Do they need repaired?
The size of your business may dictate which score banks give more attention to. The smaller the company the more they focus on your personal financial situation (i.e. mortgage, credit card debt, student/car loans, late payment history) and credit score.
A lot of business owners do not realize the business has a credit score, and it should be regularly monitored. Do not let your loan application be denied because of something you did not know existed – something that has incomplete or wrong information.
One extra question – Why would you apply for a loan, and not do what you could to get it? The long term growth of any company depends on being well capitalized. Countless once thriving, profitable businesses have failed because of poorly funded and executed expansions.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: