Running a small business, or starting a business, is no easy feat. You are likely juggling many issues at once, trying to keep everything in the air at once. This can become difficult and costly, which means that you might need a business loan at some point.
Banks often have questions to ask for business funding options for small businesses, but these are used to help guide the process. For example, you might be asked about your credit card and credit history or how you plan to increase your cash flow over the next year.
Related: Does Your Business Really Need Funding?
These questions might seem a little in-depth if you aren’t prepared to hear those questions, but if you can answer them clearly and accurately, there is a better chance of your loan being approved. Read on for the top questions lenders ask on business funding applications.
Do you have a business plan?
This is likely the first question that small business owners will be asked when applying for business finance. A business plan is essential and is used to explain your business to the lender, outlining what you do and offer to the public, as well as how you plan to make a profit.
You will need to describe your product or service, how it will bring value to the lender, who your market is and your financial status. The financial details of your business are most important to your lender, as they will need to know what your credit score is, if you have any personal assets to use as collateral, and if you need working capital in order to build your business. Not having a business plan could hurt your chances of an approved loan.
Why do you need a business loan?
It might seem a little forward, but lenders do need to know why you are applying for a loan from them, especially if you are a start-up business. If you have a good business plan, this will have been covered but be prepared to answer it again and provide an in-depth explanation.
If you cannot provide valid reasons for applying for a business loan, the lender might see you as a high-risk client. This could mean that you will incur higher interest rates each month.
Be sure to clearly outline how the loan will be used and what you will do to repay it over the period of the loan.
You shouldn’t feel intimidated about this question, as it’s standard practice for lenders to ask for more clarification as to why you are in need of financial assistance.
How much do you need?
This is a question that you will need to have answered in your business plan, but that will likely be asked in person too. The amount should not be more than you can afford each month, as this will be highly detrimental to your financial security as a business.
It’s important to note that you will be asked for how much you need rather than how much you want for your loan. You will need to be cautious and thoughtful when giving this number to your lender, as money lending is an industry with a high volume of risk. Your lender wants to see that you have thought carefully about this number and that you are only borrowing the amount you truly need.
How will the money be used?
This might sound similar to the question of why you need a loan, but it requires you to go into more detail concerning how the money will be used. For example, if you are asking for a loan for a new crane for your construction business, you cannot simply say you will purchase a crane. You will also need to explain why a crane is integral to growing your business.
Related: 3 Top Tips SMEs Should Be Aware Of When Accessing Funding
The answer to this question should show your lender that you are able to repay the loan. Using key terms such as “increasing working capital” and “improving growth opportunities” will help immensely. As will outlining exactly how the equipment or products will help your business reach new financial heights. A lender is more likely to approve a loan which is going to be used for business purposes than repaying old debts to previous lenders.
The bottom line
You will need to be as prepared as possible for a business loan application. You’ll need to answer some questions as clearly and accurately as possible so be sure to have a business plan in place in order to do so. Know exactly why you need the business loan as well as exactly how much you need. This will show the lender that you have considered the application thoroughly and that you are financially responsible.