Understanding what a lender wants to know before you apply is a good way to prepare for the questions he or she 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, but there are three very important questions you should be prepared to answer. And, they are questions you should answer for yourself first:
1. Can I repay a loan? Lenders may not ask it exactly this way, but that’s why 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.
No revenue or no cash flow usually means no loan. Nevertheless, in a recent interview, Stacy Sanchez, of the non-profit micro-lender CDC Small Business Finance said, “We look for business owners that can demonstrate an ability to repay a loan. A good business plan is important, but we’re even more interested in whether or not they have the cash flow to make the loan payments.”
If you can demonstrate to a lender your ability to make regular and timely loan payments, you improve the odds of a successful loan application.
2. Will I 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. Lenders try to predict, based upon your track record with other creditors, whether or not your business will make the periodic payments.
That’s another reason startups and other early-stage companies sometimes struggle borrowing 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 those payments. That’s why it’s so important to start establishing your business credit profile in the earliest stages of your business.
When discussing good credit practices for early-stage business owners, Peter Bolin, Experian’s Director of Consulting and Analytics, recently said, “It’s not likely you’ll be able to go into the bank and get $100,000 for working capital. Start by establishing trade credit with your vendors. Make sure they report to the credit bureaus, like Experian, and make sure you make those payments on time. This will dramatically increase the depth of your credit report so when you do need that $100,000 from the bank or other lender, you’ll be likely to get approved.”
You not only need to convince the lender that you can repay the loan, you need to convince them that you will—if you can do that, the odds of a successful loan application increases.
3. Do I have a backup plan? This is an important question. Because many business owners plan to use borrowed capital to fund projects designed to increase revenue and profits, they anticipate an increase in revenues and the cash flow they’ll need to make their loan payments. This is a reasonable expectation. Lenders want to know that regardless of the outcome of the reason you are borrowing capital, you’ll be able to make the periodic payments—in other words, you have a contingency plan.
Unlike an investor, a lender isn’t making a per se investment in your business. The loan is profitable for the lender if you make the periodic payments when they’re due. If you can demonstrate you can and will make those payments regardless of reasonable contingencies, you increase the odds of a successful loan application.
Although different lenders may have different requirements and different specific questions, if you can prepare all the information you’ll need to answer these three questions, you will have more success in your search for a small business loan—regardless of the lender.