Answer These 10 Questions Before Applying for a Loan For Your Startup
Securing a startup loan can be the vital first step toward a dream come true. But there are seven questions any budding entrepreneur needs to have answers to before sitting down with the lender.
1. What Will Make This Business Successful?
What will this company do better than any other company? What is the competitive advantage that will make this particular company sweep in and knock the other guys out of the saddle? Showing the lender you have a realistic plan for getting customers and market share, which in turn lead to a healthy profit, is the crucial first step.
2. Why Do You Need the Money?
The loan should have a clear place in the game plan with a specific number of dollars filling a capital gap required to purchase X and Y, which in turn are necessary to achieve Z results. If it is a piece of machinery, have a price quote in hand.
If it is inventory, have a quote for that. The key is to show the lender you have taken the time to research the real costs, and you have a concrete plan for using the loan to generate profit down the road.
3. How Will the Loan Be Repaid?
Getting the money back, with interest, is the first and foremost concern for the lender. This is why it is important to have a clear idea of how the loan should be structured to ascertain timely repayments without interfering with the overall progress of the company. Loan terms are always negotiable, as long as they are determined before the papers are signed.
4. Are You Trustworthy?
Since the company does not have a track record of its own yet, the lender has to look at the applicant's personal history to predict repayment reliability. Prepare accordingly, reviewing credit reports from the three reporting agencies, TransUnion, Equifax and Experian, for potential inaccuracies well ahead of time. A single black mark can cause an otherwise excellent loan application to be rejected. On the flip side, can you show a history of consistent mortgage payments and credit accounts in good standing? If so, use that to your advantage, and ask for a good interest rate since you are more of a "safe bet" in the lender's eyes.
5. Do You Have Any Collateral?
It may make sense to think a $50,000 loan to buy a machine is so simple as to have the machine be its own collateral. Not so. If things go south, a liquidation sale is unlikely to recover the full dollar-for-dollar value, which is why lenders typically only count a fraction of the asset's value for collateral purposes. You may be asked to put up additional personal property as collateral to cover the gap, which is why it is good to have a written value assessment ready.
6. Do You Have All Papers in Order?
A business loan package needs a lot of documentation beyond the business plan. Business permits and licenses, a franchise contract, professional accreditations, lease paperwork, three years' worth of tax returns and one year's worth of personal bank statements are but some of the documents typically required before a lender considers an application. Double-check the lender's list of requirements, take the time to organize it neatly in a binder and have someone else look over the business plan and other papers to catch any mistakes that might give an unprofessional impression.
7. What Happens If You Die or Become Disabled?
Unpleasant as the thought may be, accidents happen. It is important to be aware that business loans do not necessarily die along with the entrepreneur if the worst occurs. This means the bank may go after the life insurance policy that was intended to keep the roof over your family's head. Seek professional help from an advisor who specializes in small business insurance, and review the family insurance situation carefully with every "what-if" scenario on the table.
8. Why does my business need financing?
The purpose of your financing will determine many of the factors that influence your decision making. If you know what your business need for financing is, you will be able to answer many of the other questions you'll need. The reason, or your loan purpose, will determine how much you need, whether you should consider a term loan or line of credit, what payback options your cash flow can handle, and how quickly you need the money, are a just a few of the many other elements that will affect your financing decisions. These answers will help get you on your way to the best business financing options for your business.
9. What are the minimum requirements for getting financing?
Understanding a lenders minimum requirements will help you narrow down the financing options that your business will likely qualify for. This will save you time and energy before you even get started filling out applications. (check out this cool chart comparing different financing options and their requirements)
10. What is the total cost of capital, interest rate, and APR?
Once your business is offered financing from a lender, they will show you the rates associated with your loan. Many lenders and business owners only focus on the APR (Annual Percentage Rate) or AIR (Annual Interest Rate), but you should also ask about the total cost of financing so you can see exactly how much you're paying back.
Fort short term loans, some annual rates (APR/AIR) can look confusing. Have your lender explain your cost as cents on the dollar (you pay back 7 for every dollar borrowed) or as the total cost of the loan. (will you pay back $11,000, $12,000, or $13,000 for a $10,000 loan). In addition to APR or AIR, these calculations make it easier to understand the true cost of the loan and you can make the best financing decision for your business.