When you are preparing to talk to your financial institution about funding your future or current small business, you will likely have many questions.
Fortunately, a community-based financial institution is knowledgeable about the business climate in your area, so it is in a great position to provide you with all the answers you need.
Here are some specific questions that you should consider asking your lender.
What Are Your Loan Requirements?
“It would be wise to ask [financial institutions] about their specific requirements before applying,” states Patricia J. Kratz, lender relation specialist at the U.S. Small Business Administration’s (SBA) Philadelphia district office, in an article from Business News Daily. “Many [lenders] will let you know the minimum credit score they require, the cash flow you need to show, and other qualifying factors.”
Once you know the minimum requirements, you can assess where your current finances fit in, determine areas for improvement and make any necessary changes to your business plan. Working closely with your financial institution during this phase will give you a solid foundation for obtaining the right level of financing for your business.
What Financial Statements Should I Supply?
Although each lender has different requirements, many require business owners with more than a 20 percent stake in the business to be named and included in the application, and to submit signed personal financial statements.
“Most loan programs require applicants to submit personal and business income tax returns for the previous three years,” states SBA’s website. “Either as part of the loan application or as a separate document, you will likely need to provide some personal background information, including previous addresses, names used, criminal record, educational background, etc.”
What Is in the Fine Print?
Asking about the standard terms and conditions of the loan can help ensure that you have all the important information and don’t miss out on the little details that often surprise business owners when they go through the loan process.
“This question helps business owners gain information about the loan other than just the interest rate,” states Business News Daily contributor Thomas Hill. “Applicants can learn if a loan has a prepayment penalty, if and when a lender can demand full repayment of the loan’s outstanding principal, and if a grace period exists.”
Is Collateral Required?
Although many parts of the loan application process are essentially the same from bank to bank, the requirements for collateral can vary greatly. While some loan programs won’t require collateral, you may be expected to provide it if your credit score isn’t great, if you don’t have proven experience in the field of your startup or if there is another major risk factor for defaulting on the loan.
“Strong business plans and financial statements can help you avoid putting up collateral,” states the SBA. “In any case, it is a good idea to prepare a collateral document that describes cost/value of personal or business property that will be used to secure a loan.”
Is My Cash Flow Sufficient?
Just as you will have many questions during the process, your lender will also have questions for you. Some of these will be about concrete numbers and some will be more general, to assess your character and that of your business.
“Your banker will probably ask you to provide financial projections for the business,” states Lisa Girard for Entrepreneur. “Make sure to include your debt repayment plan in those projections.”
When the lender has that information, you can ask for their opinion on how easily your current and projected cash flow would be able to cover the loan repayment. Having this discussion can give you peace of mind in knowing that the loan is an appropriate size. If your financial institution thinks that things look too tight, you can scale back to an amount that will be more manageable.