May 17, 2023

7 Questions Banks Can Ask When Considering a Small Business Loan

Be ready to answer these before even calling a potential lender.

Approval rates for small-business loans are flat or declining. Most-recent government statistics report an 18 percent decline in loan approval rates at midsize bank in Q4 2022, while remaining flat at small- and large-size banks. The top reasons? Unsatisfactory financial reports, along with poor credit history and inability to offer sufficient collateral.

Being ready for a bank’s stringent review in this increasingly conservative lending climate is a must. Improve your chances of getting the cash you need by being ready to answer these questions:

1. What is the purpose of the loan – and how much do you need?

Not all reasons will appeal to a bank’s underwriters. It’s potentially less risky for a bank to lend money to a firm with proven growth, so it can buy equipment to meet demand, than to lend to a firm consolidating debt. Other great reasons include:

  • Purchase equipment or inventory

  • Fund business expansion

  • Improve cash flow for the lull in seasonal revenue

2. Can you provide financial statements?

Work with your accountant to gather your business’s financial statements for at least the past two years (or if you’re a newer business, for as long as you’ve been operating). Most banks require statements or reports on:

  • Profit and Loss

  • Business checking and savings accounts

  • Existing loans or other debt

  • Financial Projections

3. Do you have a good personal and/or business credit history?

Both matter. In fact, newer businesses may not yet have a Dun & Bradstreet credit score. Get your personal credit report from Equifax, Experian, and TransUnion.

4. Can you offer collateral?

Even if your business or personal credit history falls below bank loan requirements, you could still receive financing by submitting collateral – business or personal property that you put up to guarantee the repayment of a loan. Banks typically seek "structural collateral," such as a home or an office, as well as equipment and inventory.

5. What’s your experience in this business area?

If you’ve owned your firm for years and managed your company’s finances responsibly, that’s great. However, if you’re a startup and you don’t have proven professional success in your chosen field, that can hurt your chances.

6. Can we see your business plan?

A solid business plan proves to a bank’s underwriters that you know the competitive landscape, market demand, and what it takes to make a profit for your business for five, ten, or more years to come. Don’t wing it. Use a reputable plan template or seek assistance from a reputable entrepreneurial mentorship group to get it right.

7. Are you willing to back this loan personally?

Many business owners don’t realize how common this question is – even if they own a corporation. A bank can ask you to promise, in writing, that you’ll repay your loan using personal assets if your business defaults or dissolves.

Explore the Alternatives

With careful planning, your small business may be able to obtain financing. But if a bank says no, a growing number of alternative lenders can reduce the hassles of getting the capital you need to further your business goals.

Fora Financial collaborates with its partners and customers to develop innovative funding services for America's small businesses. Since our founding in 2008, we’ve distributed $3 billion to 35,000 businesses. For more information on how Fora Financial can help your business thrive, click here or call (877) 419-3568.