10 Things the Bank Will Ask When You Need a Business Loan

10 Things the Bank Will Ask When You Need a Business Loan

The bank will require a lot before granting a loan for your company.

Do you find this daunting? Me too. I was really disappointed when I needed my company’s first commercial bank loan to finance receivables of over $1 million—from well-known distributors no less—and we ended up having to sign a lien on our family home to get the loan.

We said, "Wait, we’re a corporation, why do we need personal guarantees?"

They said, "If you don’t believe in your business, then we don’t either."

We said, "Wait, these are good receivables, you already checked the credit ratings of these distributors, why aren’t they enough?"

They said, "If you don’t believe…" And at that point, I realized the truth in the old cynical joke that says banks will lend you money only if you don’t need it.

One of the first things optimistic entrepreneurs discover as they seek funding is that banks don’t fund business plans. In their defense, it would be against banking law if they did. Banks are dealing with depositors’ money. Would you want your bank to invest your checking account balance in a startup? I wouldn’t. And neither would the U.S. banking regulators.

So here’s what to expect from a bank when you apply for a commercial loan for your business. There will be occasional exceptions to every rule, of course, but here’s the general rule:

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1. Collateral

As I explained earlier, banks do lend money to startups. One exception to the rule is that the federal Small Business Administration (SBA) has programs that guarantee some portion of startup costs for new businesses so banks can lend them money with the government, reducing the banks’ risk.

So your business must have hard assets to back up a loan. Banks carefully examine these assets to ensure they reduce the risk. For example, when you pledge Accounts Receivable to support a loan, the bank will check the major receivables accounts to ensure those companies are solvent. They will accept only a portion, often 50 or sometimes 75%, of receivables to secure a loan. When you obtain an inventory loan, the bank will accept only a percentage of the inventory and they will assess its condition to ensure it isn’t old and obsolete.

The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to obtain a loan.

2. Business plan

There are exceptions, but the majority of commercial loan applications require a business plan. Nowadays it can be short—perhaps even a one-page business plan—but banks still want that standard summary of company, product, market, team, and financials.

3. Financial details

Provide all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and supporting information such as tax ID numbers, addresses, and complete contact information.

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