Today, I want to talk about how to do the best possible preparation for a loan application. You will need to have a good business plan and good financial records. You also need to know how much money the bank may be willing to lend to you. And you should be aware of the additional factors that banks take into consideration when you apply.
Before your meeting at the bank, do this:
Check your business plan to make sure it is up to date
Banks like people who are good planners. Your business plan should give details about your business, the industry, your competitors and your products or services. The bank will also want to know about the ownership. They will ask you what steps you are taking to ensure your business success will continue in the future. If your business is incorporated, don’t forget to bring your business registration, articles of incorporation, etc. Check out this post to see what information needs to be in a business plan.
Be prepared to explain the purpose of the loan
Before giving you any money, the bank will want to know what you will use the money for. So be prepared to explain how you will use the loan and be prepared to back up what you are saying. For example, if you want to use the money to buy equipment, show them the proforma invoices. Read this post about how to calculate how much money you can borrow so you can prepare yourself. Note: if you use the money for other purposes and you do not get approval from the bank first, you will create serious problems for yourself.
Have up to date financial records
The bank will evaluate your business finances before they decide. Meaning that at the very least, they want to see your profit and loss statement (to determine your cash flow). Cash flow: how much money is available in your business every month? They will also look at your balance sheet (to determine assets and liabilities). Assets: the things you own; liabilities: the things you owe people.
If you can give solid projections about your future sales and expenses, they will mark this in your favour. Note: If you do not keep professional records, at least take your bookkeeping records with you, but note that it will take longer for the bank to review and decide.
List your collateral
There is no way you will get a loan if you don’t have collateral! So, be prepared and make a list of the collateral that you are able to provide. Collateral can be:
- accounts receivable (money that people still owe you. Note: the bank will also take into account how many people will actually pay)
- cash and deposits
- real estate (buildings, land etc)
If you have a guarantor, they too should make a list for the bank.
Be ready to talk about your business strategy and your own investment
How prepared is your business to deal with challenges? How much money have you yourself put into the business? How much time are you putting in per week? How is the market doing and what to expect from the economic situation? More importantly: what consideration have you given these issues and how will your business deal with it? Do you have references? Review my blog post about the other factors that banks take into consideration when deciding whether or not to give you a loan.
Do a test interview
Ask somebody that you trust to help you prepare for the loan application interview. Let them ask you the kind of questions banks will ask. After you answer the questions, let the person give you feedback as to where your answers are not clear. Or lacking detail. This will not guarantee that you will be successful, but it can help you to be better prepared.
On the day of your meeting, do this:
Make sure you are at the bank office 15 – 30 minutes before the meeting. This will make you look professional. It will also give you time to prepare your mind for the meeting. Use the 15 – 30 minutes to check your documents one last time, to go over the questions that you are expecting and just calm your mind to make a professional and confident impression.
Have all the information available and present it in a professional way
You will make a very good impression if you are able to hand over any information they ask for without turning your bag upside down looking for something. And then sweating because you cannot find it. Even if you are submitting all information digitally, bring a printout in a folder.
Maybe they have asked you to fill out the loan application form before the meeting. if so, use the headings in the form as a guide to how to present the information. For example, if the first questions are about you as a person, have your ID and personal information on top. If the last questions are about your business finances, put that information last.
Show that you fully understand your business
When the loan officer asks you questions, you should not need to look into your documents before being able to answer. This includes finances. You should be able to answer questions and discuss your plans with the confidence of somebody who masters the subject. If they ask you something, provide full information to the best of your ability.
Be prepared to share confidential information about yourself and your business
Like I said 2 weeks ago, funders only give money if they feel confident that you are not a risk. If the bank has any doubt about your ability to manage the loan, they will keep asking you many detailed questions. Unwillingness on your part to answer may result in your application being turned down.
Always remain courteous
I know that it can be so frustrating when you have put in all the effort to prepare for a loan application and then they reject you! It is even worse if you are dealing with the kind of loan officer who will hardly take the time to look at your documents before telling you that you are not eligible.
However challenging it may be, the best approach is to always be professional and courteous. It may not help you get the loan today, but they will remember your attitude next time.
Getting a loan from a commercial bank takes a lot of time and effort. If your business is just starting, you will face more difficulties as compared to a business that has been doing well for 5+ years. My advice is always first try to increase your sales and reduce your expenses so you can generate money from inside your business. Only apply for a loan if you are sure that you can meet the criteria, otherwise it is a waste of time and effort.
What is your business struggling with today?
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