What Questions Will A Bank Ask You When Applying For A Business Loan?

Whether to cover unforeseen expenses or expansionary ambitions, sometimes financing is the only path forward. 

A bank might be the first lender you approach, however, banks are cautious about lending money. Their priority is that you repay the loan. You need to be a good credit risk. Your chances of being approved for a business loan increase if you go in prepared. 

In this article we cover some of the primary questions that a bank will ask you when applying for a business loan.

What Collateral Do You Have?

Collateral is the bank’s guarantee that they will receive partial payment should you default on the loan. As mentioned, the bank’s priority is for the loan to be repaid. A list of collateral is one of the first things the bank will ask for when you apply for a loan. 

Collateral needs to be hard assets owned by you and something that the bank can seize, if necessary, and sell. The proceeds from any sale go towards recouping the loan amount. Equipment and other physical assets would be examples of collateral that could be put up as security for the loan. Small businesses can also use real estate, accounts receivables, and inventory as collateral.

Putting up collateral not only strengthens your loan application, especially if your credit is not excellent, but it also makes the loan terms more favorable including better interest rates and lower monthly payments.

Do You Have A Business Plan?

Your business plan may be one of the most important components of your business loan application. Your ability to repay the loan is certainly a priority, but banks also want to know to whom they are lending. Your business plan demonstrates that you have a viable business that is sustainable over the long-term.

A well-written business plan with a mission, goals, objectives, industry analysis, marketing strategy, organizational management, and financials proves that you can think strategically and manage a business. You become a much more viable applicant in the eyes of the bank.

Your business plan should provide lenders with a concise understanding of your business, the products or services you are selling, and the potential for success. The executive summary should cover the key takeaways from the in-depth plan that follows. You want to be sure to acknowledge your competitors and how you intend to succeed.

What About Complete Financial Statements?

You might have a great product, but if your financials are shaky, the bank will not approve your loan application. At a minimum, your financial statements should include balance sheets, profit and loss statements, a summary of assets, liabilities, and a statement of cash flow.

It may be a lot of work, but without complete financial statements, your loan application is likely to be rejected. Lenders use the entire set of financial statements when deciding whether to underwrite a business loan. Your financials help the bank determine your cash flow, profits, overhead expenses, operational expenditures, and expenses vs revenues. 

If the bank sees negative cash flow, for instance, they will worry that there are hidden problems in your business or that you do not have financial management skills.

Insurance

There are three policies that loan officers typically like to see when you apply for a business loan.

• Commercial Property Insurance: This lets the bank know that your business can overcome a catastrophic event resulting in loss of property and that your collateral is protected.
• General Liability: Lenders want to know that you are insured against lawsuits.
• Workers’ Compensation: Assuming you have employees, you need workers’ compensation insurance to protect against workplace injury claims.

How Are You Going To Conduct Your Business?

Banks use financial ratios to analyze your company’s financial health. Financial ratios are usually included in the business loan agreement. For example, the bank may require you to agree to keep your current assets above a certain percentage of your current liabilities. Financial ratios indicate whether you are collecting your receivables too slowly, accumulating too much debt, or are warehousing too much inventory. 

Here are three common financial ratios utilized by lenders.

• Quick ratio: Current assets minus inventory divided by current liabilities. This measures your ability to generate cash to cover expenses that need to be paid immediately.
• Current ratio: Current assets divided by current liabilities. This measures the ability to easily generate cash to meet your short-term financial obligations.
• Debt-to-equity ratio: Your assets compared to your debt. Lenders see businesses with a high ratio of debt to equity as a greater risk.

Conclusion

There are many questions that a bank will ask you when applying for a business loan. Preparing in advance with a solid business plan and clear financial statements is the first step toward the process of being approved. 

Banks want to see you succeed, but they also want to know that their loan will be repaid. Collateral and good business practices will ensure a favorable decision.