- Knowing what a lender will ask you; and
- Coming to the table prepared.
There are certain questions that most lenders will ask, so you'll be able to give your application the best chance with some careful preparation.
Getting a business loan doesn't have to be anxiety-inducing. The promise of new equipment, redesigned infrastructure, offering new services, or taking on a new client can be very exciting for business owners.
However, before you're able to improve your business' bottom line, you'll need to find the right lender. This can be a daunting process, especially if you're experiencing the process for the first time.
Here's our guide to thinking about your business loan application the right way.
What's in the application form?
We're yet to meet a business owner that loves paperwork, and we're pretty sure there's a good reason for that. The more time you spend on paperwork, the less time you have available for your business.
Keeping your business records neat and organised (both physically and digitally) can massively reduce the amount of time it takes to complete an application when the time comes.
Make sure you've got quick and easy access to:
Your business specifics
- Business name
- Business partners (if applicable)
- Financial records
- Assets and liabilities
- Previous tax returns
- Business plan
- Credit history
- Any outstanding loans (if applicable)
- Cash flow
- Future projections
Your personal details
- Identification documents
- Salary information
- Tax return
Your asset details
If you're applying for a secured loan, you will need to provide information about the value of the asset. This may include a valuation of the asset and other information associated with the purchase of it.
If you haven't been keeping these records up-to-date, don't panic. It is possible to get organised at short notice, and it will give you the opportunity to develop a filing system that you can implement during the application process and maintain afterward.
Don't try and speed up the process by cutting corners! Give the lender as much information as possible. It's easy to get lost in the process and start trying to find the quickest route to approval. However, a loan application is just like a job interview: the interviewer (lender) might be asking the questions, but it's also an opportunity to find out whether it's the right job (loan) for you.
The more information you provide and the more transparency you display, the more likely you are to find a lender that suits your needs.
The 4 Key Questions
Understanding these key questions and what the lender is looking for in your answers will be an absolute game-changer when it comes time to submit your application.
Question 1: What is the purpose of the loan?
If a friend wanted a sizeable sum of money but couldn't tell you exactly what they planned to spend it on, would you feel positive about lending to them?
Lenders want to know how you intend to use the funds. There are a multitude of purposes that lenders will loan against, and these are typically determined by whether a particular activity is likely to add value to the business. For instance, funding the business owner's purchase of a new car for personal use is unlikely to generate higher revenue and an increased ability to repay the loan. However, an equipment finance loan for the purchase of a commercial vehicle that will increase the business' ability to deliver to a new customer segment, is likely to generate a lot of value for the business.
Every lender will want to know how you intend to use the funds. There are a multitude of purposes that lenders will loan against, including:
- Purchasing new equipment
- Refurbishing premises
- Paying invoices and/or salaries
- Buying a new property
Most lenders will require you to have documentation, such as a Contract of Sale or construction plans/approval, to support your application.
Question 2: Tell me about your business
Lenders analyse a large amount of information when determining how much they are willing to lend to a business. In order to assess risk and serviceability, the lender wants to know as much about your business as they possibly can.
Be prepared to answer questions such as:
- How long has your business been operating?
- What is your average turnover?
- Have you ever defaulted on a loan?
- What industry is your business in?
- What amount are you looking for?
- How quickly do you need the funds?
It can be tempting to give quick answers to these questions; after all, you've got a business to run! The reality is that if you want your application to be as effective as possible, you'll need to put time and energy into giving the best answers possible to each of these.
Try to visualise the application as a black and white image of your business. While it does the job, it isn't as appealing as it could be. Imagine what would happen if you added colour to the image. The more colour you add, the clearer your vision for the business becomes. The more vivid the imagery, the more appealing your application is to a lender because they can clearly see how passionate you are and why the funds are imperative for growth and expansion.
Question 3: Do you want a secured or unsecured loan?
A secured loan requires you to offer an asset as collateral, typically a property, car or piece of equipment. Secured loans offer lower interest rates and a longer timeframe for repayments, however, a lender may seize the asset if you default.
An unsecured loan does not require an asset, but a lender may request that you have a guarantor: someone that will repay the loan if you are unable to. Unsecured loans are ideal for quick, short-term finance, however, they typically attract higher interest rates.
Question 4: Do you want a fixed or variable interest rate?
Fixed rates are locked in for a specified period of time, making it easy to plan your repayments.
Variable rates can fluctuate, meaning that a drop in interest rates would reduce your repayments. However, an increase in the interest rate would also increase your interest rates. It can be difficult to know which is more conducive to lower repayments overall because interest rates tend to fluctuate and can be unpredictable. Be sure to consult your accountant or trusted business adviser when making this decision.
Okay, so what do I need to remember?
There are 4 key questions to keep in mind when preparing to make a loan application.
The lender is likely to ask you:
- What is the purpose of the loan?
- Tell me about your business
- Do you want a secured or unsecured loan?
- Do you want a fixed or variable interest rate?
Obtaining a business loan doesn't need to be complicated. Having the right information ready-to-go will make the experience a lot less stressful.
Alex is the co-founder and CEO of Valiant Finance. He brings a wealth of experience from his time as a banking consultant at McKinsey, and has a background in Business and Law.