1. Is it likely I’ll qualify for the loan?
You’re only going to hurt your credit if you apply for a loan you won’t
get. “Just like if you get declined for a personal credit card, it
makes it more difficult to borrow in the future,” says David Gass, a
business consultant and CEO of Anderson Business Advisors. “If you get
turned down, it looks to the next bank like you’re a bad risk.” He
suggests asking lending institutions about their specific requirements
before applying. Many will let you know the minimum credit score they
require, the cash flow you need to show and other qualifying factors.
2. How much do I really need?
Before you approach
the bank, make sure you have a good handle on how much cash you
actually need. The best way to determine this is to create a monthly
cash-flow projection. For example, if your customer pays you in 60 days
but you have to pay your vendors in 15 days, you might need some extra
money to tide you over.
“It will reflect poorly on you if you come into the bank asking for
$50,000, then they ask you to create a cash-flow projection and you
find out that you actually need $100,000,” says Adam Hoeksema,
co-founder of Muncie, Ind.-based ProjectionHub, a web app to help
entrepreneurs make financial projections. “You should know how much you
need and how you will use the funds before approaching the bank.”
3. How much can I borrow based on the asset I’m using for
Business owners often think if they purchase a
piece of equipment for $100,000, they should be able to borrow $100,000
by pledging the equipment as collateral. But banks usually don’t agree,
Hoeksema says. “Banks will value your asset below what you think the
value should be, and then they’ll only lend up to a certain percentage
of the value of the asset.” For example, banks might lend up to 70
percent of the value of a new piece of equipment, and maybe only 60
percent for used equipment.
Related: 6 Smart Reasons to Get a Business Loan
4. Do I have adequate cash flow to repay the loan?
Your banker will probably ask you to provide financial projections
for the business. Make sure to include your debt repayment plan in
those projections. Bankers are going to be looking for businesses that
have some wiggle room, and you may need to show available cash flow
that’s three times greater than your debt payment requirements,
Hoeksema says. “They don’t want to see if you lose one customer, you
won’t be able to make your loan payment this month,” he says. “If your
projections show that you have very little room for error, you’re
likely to scare them away.”
5. Will the money help my
If you’re borrowing $10,000 for payroll or
other routine operating expenses, you’re not generating more revenue
from the loan and could find yourself in the same spot three to six
months from now. Instead, you should put borrowed dollars into the
parts of the business that will generate more revenue over time and
help reduce future borrowing needs, Gass says. “If I take that dollar
and leverage it, put it into sales and marketing and drive more
revenues -- $1 driving $5 -- then it’s worth it. It’s all about growing
6. How good is my business credit score?
Many people may know their personal credit score, but very
few know their business score, says Rohit Arora, CEO and cofounder of
Biz2Credit, a New York City-based company that arranges loans for small
businesses. As with personal credit, you can find your business credit
score through Experian, TransUnion or Equifax. If the score isn’t as
high as you think it should be, it might be because there are
outstanding liens against your business. Also check to make sure your
vendors are reporting your payments.
You can try to boost your score
by reducing the balance on your business credit cards or requesting a
credit-line increase to lower the percentage of your available credit
in use. “The lender is going to check your business, and your score is
the final arbiter of whether you get the loan or not,” Arora says.
“Even if you have stellar personal credit and good assets, if a lot of
business contacts are saying you’re paying them late, that’s going to
scare off lenders.”
7. Are my personal finances in order?
Bankers may want to look at your “global financial
statement,” including personal information like outstanding student
loans, personal credit card debt and mortgage payments. Until your
business reaches a substantial size ($5 million to $10 million in
annual revenue or more), the bank is going to rely heavily on your
personal financial statement and personal credit score to determine the
creditworthiness of your business. “If you have a $200,000 mortgage on
a house worth $250,000, and you have $200,000 in student loans, the
bank may not see you as a good candidate for a loan,” Hoeksema says.
“If you have a lot of personal debt and very little collateral that you
can provide to the bank, you may need to find a h3 co-signer.”
8. Do I have all the
documentation I need to apply for the loan?
Arora says some studies
have shown that as many as four in five loans never close not because
the business didn’t qualify, but because of the paper chase. When
applying for a business loan, you will need a lot of documentation. For
example, if you’re seeking an SBA loan, Arora recommends you provide
the last three years of business and personal tax returns, personal
financial statements and financial projections for the next 12 to 24
months. “If you go to the [lender] and aren’t fully prepared, not only
does it make you look unprofessional,” he says, “but by the time you
get the documentation in place, it might be outdated.”
Avoid These 5 Common Small-Business Financing Mistakes
Does the loan have a prepayment penalty?
When taking out a
loan, find out if you’re free to pay it off early without any penalty.
Some states allow lenders to charge prepayment penalties, in which case
you should try to negotiate a compromise. For example, you could agree
to a penalty only if you pay off the loan in a relatively short period
of time, say, within six months from the time of the loan. “Prepayment
is especially valuable if you believe your business may grow soon, and
you may need a larger line of credit,” says Jeanne Brutman, a New York
City-based financial planner for small-business owners. “By having good
excess cash and a paid-off or [paid-down] line of credit, it shows the
lender you’re responsible with debt and can handle an increase in your
10. If I die, how will the loan be repaid?
It’s something most people don’t like to think about, but
in the event of your death, an unpaid business loan can affect your
family. “Most people think, if I die, the bank is out of luck, but
that’s not true,” Brutman says. If you leave a large life insurance
policy, for example, the bank may come after that. Find out what a
lender’s policy is in the event of your death to best determine how to
protect your family. “Most business owners understand that if they’re
collateralizing their house and the business fails, they could lose
their house,” Brutman says. “But they may not understand that if they
die, it doesn’t cancel out their debts.” It may be best to put your
assets in your spouse’s name, if the spouse doesn’t have an ownership
stake in the business. Brutman also recommends personal property and
casualty insurance coverage, which, in the event of your death, takes
business debt into consideration.