10 Questions to ask before applying for a bank loan

Most small business owners need a bank loan at one time or another, and the application of much more than filling out paperwork and say a prayer. Among other things, consider the state of their personal finances and business, how you will repay the loan, and the amount of money you really need.

Here are some key questions to ask before starting an application:

Is it likely that I will qualify for the loan?

You’re just going to hurt your credit if you apply for a loan that will not. “Just as if you are denied a personal credit card, which makes it harder to get loans in the future,” says David Gass, a consultant and trainer in Meridian, Idaho. “If you are turned down to the next bank seems like you are a bad risk.” He suggests asking credit institutions regarding their specific requirements before applying. Many of you will know the minimum credit score they need the cash flow you need to show, and other qualifying factors.

How much do you really need?

Before approaching the shore, make sure you have a good handle on how much money you really need. The best way to determine this is to create a projected monthly cash flow. Does your customer pays within 60 days, but have to pay their suppliers within 15 days? If so, you may need extra money to help. “It speaks ill of you if you come to the bank asking for $ 50,000, then you are prompted to create a projection of cash flow and you find you really need $ 100,000,” said Adam Hoeksema, co-founder of Muncie, based ProjectionHub Ind., a web application to help entrepreneurs make financial projections. “You should know how much you need and how you will use the funds before approaching the shore.”

How much can I borrow against assets that I am using guarantees?

Business owners often think that if they buy a piece of equipment of $ 100,000, which must be able to borrow $ 100,000 to pledge as collateral equipment. But banks are not generally agree, Hoeksema said. “The banks improve their well below what is thought that the value should be, and then to a certain percentage of the asset value provided.” For example, banks could lend up to 70 percent of the value of a new piece of equipment, and perhaps only 60 percent for a piece of equipment used.

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Do I have enough cash flow to repay the loan?

Your banker will probably be asked to provide financial projections for the company. Be sure to include your debt repayment plan in these projections. Bankers will be looking for companies that have a margin for maneuver, and can show the cash flow that is three times greater than its debt repayment needs, Hoeksema said. “They do not want that if a customer is lost, you will not be able to make your loan payment this month. If your projections show that you have very little margin for error, it’s likely to scare.”

Does money help grow my business?

If you borrow $ 10,000 for payroll or other routine operating expenses, more income is generated loan and could end up in the same place three to six months from now. Instead, you need to borrow dollars in the areas of the company that will generate more revenue over time and help reduce future borrowing needs, Gass said. “If I take that dollar and leverage, as sales and marketing and more revenue – $ 1 $ line 5 -. Therefore, it is worth all about growing the business.”

What is my credit score company?
Most people know that your personal credit score, but very few know that your score business, said Rohit Arora, CEO and co-founder of Biz2Credit, a company based in New York that organizes loans for small businesses. As with personal credit, you may find that your credit score company through Experian, TransUnion or Equifax. If the result is not as high as you think it should be, it could be because there are outstanding liens against your business. Also, make sure your suppliers are reporting their payments. You can try to increase your score by reducing balances on your credit cards or apply online credit increased to lower the percentage of your available credit in use. “The lender will verify your business, and your score is the final arbiter on whether you get the loan or not,” Arora said. “Even if you have a good personal credit stellar and assets, if a large number of business contacts say you pay late, it will scare lenders”.

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My personal finances in order?

Bankers may want to look at your “global financial information”, including personal information, such as outstanding student loans, credit card personal credit and mortgage payments. Until your business reaches a significant size ($ 5 million to $ 10 in annual sales and more business), the bank will depend largely 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 home worth $ 250,000 and has $ 200,000 in student loans, the bank can not be seen as a good candidate for a loan,” said Hoeksema. “If you have a lot personal and very few guarantees that it can offer to the bank debt, you may have to find a strong co-signer “.

Do I have all the documents that I have to apply for the loan?

Arora said some studies have shown that nearly four out of five loans never close – “. No, because the company does not meet the requirements, but due to hunting paper” When applying for a business loan, you need a lot of documentation. For example, if you are seeking a loan from the Small Business Administration, Arora recommends leaving the last three years of the company and personal tax returns, personal financial statements and financial projections for 12 to next 24 months. “If you go to the [lender] and is not fully prepared, not only make you look unprofessional, but at the moment of receiving the documentation in place, could be obsolete,” he said.

Is the loan has a prepayment penalty?

When you take a loan, if you are free to pay without penalty. Some states allow lenders to pay prepayment penalties, in which case you should try to negotiate a compromise. For example, you can agree a fee for repaying the loan in a relatively short period of time, for example, within six months from the time of the loan. “At the beginning is particularly useful if you believe your business can grow quickly, and you may have a larger credit line,” said Jeanne Brutman, a financial planner based in New York for small business owners. “In a good surplus cash and paid compensation or credit line [paid below] shows that the lender is responsible for the debt and can handle an increase in total credit.”

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If I die, how you will repay the loan?

It is something that most people do not want to think, but in the case of death, unpaid business loans can affect your family. “Most people think, if I die, the bank is out of luck, but it’s not true,” says Brutman. If you leave a large supply of life insurance, for example, the bank can come later. Find out what the policy of a lender in the event of his death to help determine how to protect your family. “Most business owners understand that if they promise not home and business, could lose their homes,” says Brutman. “But they can not understand that if they die, do not pay off their debts.” It may be better to put your assets in the name of your spouse, if the spouse has no interest in the business. Brutman also recommends covering personal accident insurance, which in the case of death, taking into account corporate debt.