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9 questions to ask yourself before requesting a loan

Looking for a bank loan involves much more than filling out an application and praying ...

This article was translated from our Spanish edition. This article was updated on October 19, 2019
This story originally appeared on Querido Dinero

Applying for a bank loan involves much more than filling out an application and praying. Among other things, you need to consider the status of your personal and business accounts. You must think about how you are going to pay the loan and how much money you really need. These are some of the key questions to ask yourself before applying

Querido Dinero

1. Can you qualify for the loan?

If you apply for a loan that you will not receive, you will only damage your credit (as happens if your credit card is rejected).

"If you get turned down, the next bank will consider you a risk," says David Gass, business consultant and CEO of Anderson Business Advisors. Gass suggests asking credit institutions about the requirements to apply. Many will let you know the minimum credit points required, the cash flow you need to prove, and other factors.

2. How much do I really need?

Before approaching the bank, make sure you have a good idea of the cash you really need. The best way to determine this is to create a monthly cash flow projection. For example, if your client is going to pay you in 60 days, but you have to pay your salespeople in 15, you probably need some extra money to get out of trouble.

Adam Hoeksema, Co-Founder of Muncie, Ind. ProjectionHub, a web application to help entrepreneurs make financial projections says: "If you go to the bank to request $ 50,000, and the moment they ask you to prepare a cash flow projection you discover that you really need $ 100,000, you will look very Wrong. ”Know how much you need and how you are going to use the funds before approaching the bank.

3. How much can I borrow based on the active account that I use as collateral?

Business owners often think that if buying a machine costs $ 100,000, they should borrow $ 100,000 and put it as collateral, but banks generally disagree. "Banks are going to value your active account below what you think it should be, and then they will only loan you up to a certain percentage of the value of that account," says Hoeksema. For example, banks could lend up to 70 percent of the value of a new machine, and perhaps 60 percent for a second-hand one (this without counting the interest you may pay).

4. Do I have adequate cash flow to pay off the loan?

Your banker will probably ask you to provide financial projections for the business you have in mind. Be sure to include your debt repayment plan in those projections. Bankers will look for businesses that are easy to grow and can demonstrate that available cash flow is three times greater than debt repayment requirements.

"The bank doesn't want to see customers at a loss because that way they wouldn't be able to repay the loan. Instead, your projections should show that you have a very short margin of error," Hoeksema said.

5. Will the money help me grow my business?

If you borrow $ 10,000 pesos for payroll or other routine expenses, you will not generate more income from the loan and your business could remain stagnant for three to six months. Instead, you should put the money in the parts of the business that will generate the most income over time, in a way that helps you reduce future loans.

"If you take that money, set it aside and spend it on sales and marketing, and that generates more income (5 pesos for each peso injected) then it's worth it. It's all about growing the business," says Gass.

6. How good is my business credit score?

You can try to improve your Credit Bureau score by reducing the balance of your business credit cards or by requesting an increase in the credit line to reduce the percentage of your available credit in use. The lender will check your business, and the referee who says if you receive the loan or not will be your score.

7. Are my personal finances in order?

Bankers are going to want to see your "global financial status," including personal information like outstanding student loans, credit card debt, and mortgage payments. Until your business reaches a considerable size (of at least 5 million pesos in annual income or more), the bank will depend largely on your personal financial status and your credit points to determine the solvency of your business. "If you have a large mortgage and also owe student loans, the bank will not see you as a good candidate for a loan."

8. Do I have all the necessary documentation to apply for the loan?

Some studies have shown that up to four out of five loans never close not because the business doesn't qualify, but because of a lack of documents. When applying for a business loan, you will need a large amount of documentation.

9. If I die, how will the loan be repaid?

In the event of your death, an unpaid business loan can affect your family - this is something most people don't like to think about. "Most people think that if you die, there is no more debt, but that's not true," says Brutman. Find out what a lender's policy is in the event of your death to better determine how to protect your family. "Most business owners understand that if they are guaranteeing their home and the business fails, they could lose their home," "But they may not understand that if they die, their debts will still be there." Brutman says. You may find it best to put your assets in the name of your spouse, if he or she does not have an ownership interest in the business. Brutman also recommends personal injury insurance coverage, which, in the event of your death, takes business debt into consideration.