Starting a business? Here’s everything you need to know about getting a business loan

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Starting a business is exciting and anxiety-inducing, all at the same time. Will you attract enough customers? Can you pay the bills and how will you pay those start-up costs? That’s why for many Canadian entrepreneurs the logical answer is to take on debt. But how do get a business loan? Is it the same process as getting a personal loan? And how do lenders determine creditworthiness, business loan interest rates, as well as small business loan terms?

But before you can access funds to start or grow your business, you’ll need to convince a bank or lender to loan you the money. To help, here are seven questions you should prepare to answer — seven questions that virtually all lenders will ask after you apply to get a business loan.

Answer these 7 questions when applying for a business loan

Even if your business plan is solid and you’re confident that your new business will succeed or your current company will grow, the key to getting a business loan is to be prepared. To help, here are seven questions most lenders will ask after receiving your application for a business loan.

How to get a business loan: Question #1 — Can you explain your business?

Lenders need to benchmark your company against other companies, in order to get a better idea of the risks and rewards of providing a business loan. A company that is extremely unique will find it harder to get a traditional business loan, as there is little for the lender to use in the way of comparison. To help alleviate this problem, come prepared with an explanation of what your business is and does. While this explanation should be relatively simple and short, it should also offer enough details to help the lender appreciate the earnings potential.

A good start is to create an elevator pitch — a 15-second explanation of what your business does. Then expand to a 45-second and a 90-second version. The 45-second version explains what your business does and how, while the 90-second version explains what your business does, how it does this along with an overview of the origins of the company. Remember these brief explanations of your business are meant to quickly illustrate what you do, how you make money and the strategic strengths it has in the marketplace.

How to get a business loan: Question #2 — Why does your business need a loan?

It’s not enough to tell the lender that you want to start or grow your business, you need provide a clear plan on how the money will be used. This includes details on when and where the money will be spent; how that expenditure will help start or grow your business and how long you expect before you see a profit on this investment. The key is to come prepared. Know your business strategy. Understand how that strategy will grow the business and provide dollar values on the pre- and post-investment earnings.

How to get a business loan: Question #3 — How long will you need to pay back the loan?

If you’ve done the research to come up with a comprehensive business plan, then it should be relatively easy to determine how long you will need before you can repay the debt. Remember, the answer to this question is about illustrating how realistic and well-researched your business growth plan is and not a measure of how accurate you are about the lender’s loan terms.

Don’t be too ambitious about paying off debt if it puts constraints on your company’s ability to grow. The reason you want a business loan is to help stabilize your business or grow your company. Place an unreasonable expectation on yourself regarding the repayment of the loan and you could find yourself looking for a more expensive, short-term loan just to bail you out.

How to get a business loan: Question #4 — Do you have records for accounts payable and receivable?

No matter the sum of the loan, it’s critical to show the money coming into the business and the funds going out. By keeping your books up to date — including your annual tax returns — you can easily demonstrate where the money is spent, how profit is earned, and the profit trend you are looking to maximize with an injection of funds.

Some business owners use personal bank accounts for business income and and expenses. Over time keeping track of income and expenses in an acccount that is not dedicated to your business can become difficult — and, worse, it’s hard to illustrate the success of your company if your bank records are a mess. As you prepare for a business loan interview, be sure to set up dedicated business bank accounts.

How to get a business loan: Question #5 — How do you explain past business failures?

As a small business owner looking for a business loan, it can be intimidating to talk about past business failures. The fear is that a previous failure will convince a lender that you aren’t a successful company. But lenders ask about past business failures for a few reasons. For instance, a past business failure can highlight how your firm tried a different revenue stream only to find out it didn’t work and to reinforce the need to grow a profitable part of the business. Talking about the lessons learned in a past business failure also helps to reinforce that you are actively growing and evolving — doing what is necessary to be a profitable company. Finally, it gives you a chance to explain any financial losses that may be perceived poorly, until the lender has a better understanding as to what happened and how the business adapted and grew from this loss.

How to get a business loan: Question #6 — Do you have insurance or a business license?

Building a company is just as much about finding clients and earning a profit as it is about mitigating any downside risk. Smart business owners know that a simple way to minimize risk is to pay for insurance and to keep all applicable licenses up-to-date. While some lenders will refrain from asking about this until the final stages of a loan application, it’s a good idea to have this information prepared in the early stages of shopping for a business loan. Not only does it show you are serious about the long-term health of our business, but it sends a signal that you are organized and competent and more than ready to take on the responsibility of a business loan.

How to get a business loan: Question #7 — Can you tell me about your personal credit?

For sole proprietors and business partners, lenders will most definitely ask about your personal creditworthiness. This can include your credit score, your current debt-to-income ration as well as assets that are in your position. The idea is to show that you are not using the business loan to pay off personal debt, but rather as a method of sustaining or growing the business.

If you are a business owner of an incorporated company, you may not be asked about your personal debt obligations — although some lenders still require this information — but you will need to prove the creditworthiness of your business. Be prepared to show the assets owned by the company, along with any other debts the business is paying back.

What is the bank or lender wants to conduct a business loan interview?

While some lenders will offer funding through online applications, many traditional lenders, such as banks and credit unions, may require an in-person business loan interview. This is another step in trying to determine the feasability of your business plan and whether or not you and your business meet the lender’s risk qualifications.

There is no reason to fear a bank or lender interview, but you should also take is seriously. Consider it the small business equivalent to a job interview. The lender is the equivalent of an employer and you need to convince this lender that your business is the right candidate for this investment of money.

During the interview, focus on:

Clearly showing the financial stability of your business to make loan payments on time and in full – even when there’s unexpected trouble.
Demonstrate the track record of your business in successful spending, borrowing and generating positive cash flow.
Illustrate how you, the small business owner, has the knowledge and financial means to cover any unexpected costs or failures, thereby minimizing the risk of loss to the lender.

Tips for getting a business loan: How to ace the interview

To help you ace a business loan interview, whether online or in-person, here are a few tips:

Know your business plan inside-out. The only way you can answer any left-field curveballs is to make sure you’re deeply familiar with your business plan. Backing up your claims with figures and examples definitely helps.
Research your lender and your interviewer. Performing a simple Google search on your lender and interviewer can go a long way. Look for information about other borrowers’ experiences and any professional details, like where they went to school or how long they’ve been with the organization.
Hold a mock interview. Practising an interview can reveal both strong and weak points in your argument. Doing it more than once can help you measure improvement. Ask a friend or family member to rehearse with you.
Have relevant documents on hand. Even if it isn’t required, it doesn’t hurt to take hard copies of your financial records, proof of past ownership and charts of current management or any other documents you think can strengthen your argument for why you should land this loan.
Take along visuals. Photos of your business, products or even artistic graphics of your services can bring your presentation to life. Make sure your visuals are uncluttered, easy to read and to-the-point.
Be confident. Practise power stances, get enough sleep, wear your lucky socks – do whatever makes you feel like you’re going to crush this interview. When in doubt, remember that you’ve prepared and are ready for anything. You’ve got this.

Help! My interview went terribly! What do I do?

Don’t panic. There’s a chance you didn’t have a terrible interview and that your nerves are making you second-guess your experience. Remember, the interview is just one part of the application process. While it’s important, it’s not the only factor that a lender will use to assess the business loan application.

Also, don’t be afraid to be proactive — and kind. Even before you hear back from the lender, thank the interviewer for the opportunity to sit down and discuss your business plans. Thank them for taking the time to speak with you and remind them of the projected earnings you hope to achieve after investing the business loan into your company’s growth.

Then, you wait. While waiting can be hard, don’t let it paralyze you. Keep working at growing your business, including looking at other lending options. It’s always best to prepare for the possibility that your application is rejected. Best case scenario, you’ll have multiple offers from lenders and you can pick the business loan with the best interest rate and loan terms.

What can I do if I get rejected for a business loan?

Chances are, there is a very logical reason for being rejected and it had nothing to do with your business loan interview performance. It could be that you’re a start-up and the lender doesn’t work with start-ups. (If that’s the case, it’s best to work with a lender that does focus on start-ups.) Maybe there was something in your financials that the lender found to be too risky. In the event of a rejected business loan application, take the following steps:

Figure out why you were rejected. Some lenders may inform you why you were rejected, whereas for other lenders you may need to ask directly.
Incorporate the feedback. Whatever the reason you got rejected, incorporate the feedback into your business plan, visuals for presentations, financial statements and so on.
Learn from the experience. Even though it can be discouraging to get rejected, try your best not to take it personally. At the end of the day, it’s just business and that lender wasn’t the right match. Learn from the experience and you’ll do even better during the next business loan interview and application.
Apply for business loans again. When you’re ready, begin applying and interviewing with new lenders. Always check the minimum requirements before applying to ensure you’re eligible and not rejected for something foreseeable. Be sure to incorporate previous feedback from lenders into future loan applications too.

Bottom line

Applying for a business loan can be nerve-racking but preparing in advance can really help you show the feasibility of your business and the importance of the loan. Remember to review the loan options by all lenders — banks, credit unions as well as non-traditional lenders — to find the best loan options to grow your business.

About the Author

Romana King is the Canada Group Editor at Finder and a personal finance expert. As an award-winning personal finance writer and real estate expert, she has spent almost two decades helping Canadians make smarter money management decisions. Her first book, House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth, launched in November 2021, continues to be an Amazon bestseller and won the Excellence in Financial Journalism Book Award in 2022.

This article originally appeared on FinderCanada and was syndicated by MediaFeed.

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