By Emily Suess
Obtaining a small business loan can be a necessary but difficult part of your career as a small business owner. Here’s what you need to know before you talk to a lender.
Be Prepared to Answer the Lender’s Questions
It’s good to go into a meeting with a potential lender prepared. It saves you both time, and it also shows the lender that you’re not just requesting money on a whim; you’ve considered the option carefully and you have a plan.
Here are some questions you will probably be asked during your meeting:
- Does your business pay its bills?
- Does your business collect money owed?
- Will the business be able to repay the loan?
- Will you be able to repay the loan if your business fails?
- What is your credit history?
- How does the business control inventory and expenses?
- Is your business profitable? Does it have a history of being profitable?
- Have sales declined, increased or stayed the same?
- What can you say about the future of your industry?
- Who is your competition? Are you competitive in the marketplace?
After running through these questions on your own, you might realize you’ve got some work to do before you’re ready to apply for a loan.
Can You Repay the Loan?
Of all the questions a lender might ask, this is the one that’s most important. You will have to verify your ability to repay the loan. Typically a lender will look over your financial records to determine cash flow and assess your ability to make payments, whether from earned profits, secondary collateral sources, or both.
Know Your Personal Credit History
If you ask for a small business loan, the lender will look at your personal credit history as well as your business credit history. Don’t be caught off guard.
You can request your personal credit report from the three major bureaus to review them for errors and check for outdated items. It takes time to correct errors on a report, so don’t wait until the last minute to examine it. It should be in the best possible condition when the lender finally pulls it for review.
If there are items on your report that adversely affect your credit, they could keep your loan from being approved. However, it can be helpful to prepare a written explanation of credit problems and how they were rectified. For example, if you had poor credit following a medical crisis but your credit before and after the event was good, point this out. It shows your willingness to pay back your debts, which can actually help you get approval.
Defend Your Qualifications
Finally, don’t forget that your education and success in business can positively influence your chances of being approved for a loan. Because poor management is one of the most common reasons for business failure, lenders will check that your education and experience—and that of your managers—is strong. If you think a business loan is in your future, it could be worthwhile to attend free management training courses from organizations like SBA.gov and Score.org.
Have you applied for a small business loan? What tips would you add to the list?