6 Questions to Ask Before Applying for a Corporate Loan
If you own a small business, then there’s one thing you can be sure of, and that’s the fact that time will come when you’ll need to apply for a corporate loan. But applying for a loan involves more than just filling out paperwork, praying, and hoping for the best. You need to consider several factors – such as your business and personal finances, how you plan to repay the loan, and how much money you need – before you head to the bank and start filing applications. Let’s look at some of the questions you need to ask before applying for any loan.
- What are your chances of getting the loan?
If you know your chances of getting the corporate loan is minimal, then why bother applying>? It’ll only end up hurting your credit score if you don’t get it. If you request a personal credit card and you are declined, it affects the chance of you borrowing in the future. The same principle applies here. If you request a loan and get turned down, the next bank will look at you as a safety risk. Before applying for a loan, consider asking the particular lending institution their specific requirements.
- How much do you need?
Before you go to the bank, ensure that you have a good handle on your finances and the amount of cash you require. The easiest way to determine how much you need is to create a monthly cash-flow projection. This helps you get a very near estimate of how much you need and also, make the bank take you more seriously. Imagine requesting for a $50,000 loan, and after making a cash-flow projection, you find out that you need up to $100,000. It’s not only embarrassing, but it makes it easier for the lending institution to turn you down seeing as you don’t have your affairs in order.
- How much can you borrow with the assets you have as collateral?
The average business owner believes that because he bought equipment for $100,000, he could get $100,000 loan by putting the equipment up as collateral. Unfortunately, banks don’t agree with that thinking. Banks tend to value your assets lower than what you think it should be and even with that, they’ll only lend up to a certain percentage of the asset value. For example, if a new equipment costs $100,000, the bank will only give 70% of the value. If it was a used equipment, however, then they’ll only offer 60% of the value of the asset.
- Is there an adequate cash flow coming in?
As difficult as getting a corporate loan can be, paying it back is even twice as hard. If you don’t have an adequate inflow of cash, then paying back that loan could be a real problem as time goes by. One of the documents your banker would probably ask for is your financial projections for the business. Don’t forget to include your debt repayment plan in your financial projections. Bankers tend to favor small businesses with some wiggle room so you would probably need to show that the available cash is three times greater than what your debt payment requires. If they see that the loss of one customer can delay your ability to pay your loans, you’ll end up chasing them away after all no bank wants to do business with someone that may be a flight risk.
- Will this money help your business grow?
If you’re going to borrow, then it should be for the right reasons like investing in the part of the business that will generate more revenue and reduce the need to borrow in the future. If however, you’re borrowing $10,000 for payroll or any other routine expenses, you’ll find out that the loan you took isn’t generating any revenue. Chances are months will go by, and your business and finances will probably be in the same spot.
- Do you have a good business Credit Score?
Most people are aware of their personal credit score but not their business credit score. If your score isn’t as high as required, then chances are you’ll be turned down by most banks. The good news is that like your personal credit score; your business score can also be improved. You’ll also want to check to see if there are any outstanding liens against your business that could be affecting your business credit score. One way you can try to boost your score is to reduce the balance on your business credit cards.
If you answered yes to the questions brought up, then you can go right ahead and apply for that loan. If any of the answers were no, then maybe you’re not as ready for a corporate loan, and you only think you are.