Business Loan: Questions Your Lenders Will Ask
Getting approved for a business loan can be hard work, but you can improve your chances with the right preparation. Generally, lenders want to ensure that you have the financial capacity for repayment. Aside from providing them with proof of your source of income and good business credit score, they also ask questions to get a better understanding of your financial situation.
Some of the common questions your lender may ask before deciding on your business loan application include:
1. How much money do you need?
Despite having an idea of the amount you want to borrow based on your application form, the lender may still want to hear it straight from your mouth during the interview. This is because the lender wants to press you for what you “need” and not what you “want”.
When answering this question, present yourself in a way that suggests that you’ve carefully thought of your business needs and that you’re borrowing based on what you need.
2. How will you use the fund?
This is usually a follow-up question to the inquiry above. While the lender may already have the idea of the purpose of your loan, they still want to hear your explanation on how you’ll use the money.
Technically, your purpose of borrowing money is to, say, for instance, purchasing business equipment or buying more products. What your lender wants to hear, however, is your explanation about how the equipment or products are essential to your business.
3. How will you repay the loan?
You will repay the loan through the profit you get from your business, of course. However, your lender asks this question because they want to have more assurance that you can make the repayments.
So, aside from discussing the profitability of your business, your answer should discuss your assets and personal collateral that can repay your debt if in case your business fails.
While on this inquiry, your lender may also ask about your previous business or personal tax returns, as well as outstanding debts that could affect your repayment commitment.
4. How would you summarise your business?
Your business plan has all the answers to this question but being asked in person would give you the chance to elaborate on your business’ strengths. Thus, your answer should be an elevator pitch that highlights your business’ profitability and cash flow. You may also need to talk about your business’ bank accounts, investment accounts, credit card accounts, debt obligations, and other financial details.
Be prepared to answer any follow-up questions that probe into financial hardships that your business has experienced.
5. How do you manage your accounts payable and receivable?
This inquiry probes into how you manage what people owe your business and what you owe others. Your answer will provide the lender idea of your business cash flow, as well as the companies that you are dealing with.
Provide a detailed discussion of your accounts payable and account receivable. Your answer will be best supported by documents so have them at the ready.
6. Can you make the payments required under the loan?
Your answer will be, of course, “yes” followed by an explanation of how you can make that happen. Hence, you need to highlight again your business’ strengths and profitability. Your goal is to ensure the lender that you have a solid cash flow to make the repayments.
Your lender may ask for your balance sheet, as well as profit and loss statement from the previous years.
If you’re just starting a new business, your answer should dwell on your strong business expertise and knowledge in the particular industry that you’re joining. If you’ve owned and managed a profitable business venture in the past, don’t forget to share this with your lender.
7. Can you discuss your credit history?
The lender has likely checked your credit profile even before interviewing you. However, you may still be asked this question in-person to learn more about your creditworthiness and debt management.
When thrown with this question, the lender is giving you the chance to explain yourself, as there may have been sensible reasons why you’ve missed payments or had your collateral repossessed.
Thus, this is your chance to elaborate on any derogatory marks in your credit report, like a record of repossession or late repayments. If you have a so-so credit score, your explanation can make or break the lender’s approval decision.
8. Can you put up any collateral?
The collateral is an asset, like a land or property, that you pledge as security for the loan. The lender will take possession of it if you cannot repay your loan on the agreed term. Thus, the collateral is extremely important if you’re applying for secured business loans.
Some lenders, however, may allow a personal guarantee on the loan as an alternative for collateral. In a personal guarantee, you legally state that you are personally responsible for the loan if your business fails and declares bankruptcy. While a personal guarantee is not tied to a particular asset, it puts you in a tough spot to pay back the loan no matter what happens to your business.
Your lender ask questions because...
It is difficult to approve business loan applications based on only the business plan, financial records, and credit history. There are thousands of people who apply for business financing every day but the lending funds are limited. Your lender has to make sure that the money goes to those who are worthy of financing and capable of making repayments.
This is why it is important to come to the lender’s interview prepared. The more you can answer the questions eloquently, the higher the chance that your loan application will be approved and your business project will be financially supported.