You may need funds to run your startup and approach a bank for a business loan and even get it as well. However, you must be ready with a lot of answers to give to the bank who will typically ask a lot of questions to you before granting the loan.
You may find this a bit daunting task, especially if you are not aware of the specific questions that banks may ask you. Remember, if you cannot answer the bank, or any moneylender for that matter, comprehensively then you will really be disappointed when your application gets rejected.
This is the common principle followed in money lending by all lenders whether it is a traditional bank or any other online source such as Libertylending.com or any other. This they do to make sure that the amount of money they risk on you is recovered in full along with the interest well within the stipulated time.
It is only when you satisfy the bank and make them believe that your startup business has lots of prospects you will be able to get the loan. Otherwise, you may even have to end up signing a lien on your family home in order to get the loan, if you are too desperate.
The simple reasons why banks are so strict in lending money to business startups are:
· They do not fund business plans and if they do that will be against the banking law and
· They deal with the money of the depositors which they need to protect at all costs.
Just as you will not want to put in your checking account balance in your startup so will not the banking regulators. Period.
Therefore, when you approach a bank for startup funding, expect the bank to ask a few serious questions to you when you apply for a commercial loan for your startup business. However, there will be occasional exceptions to the rule but the banks will always and surely follow the general rule.
About the collateral
Those banks that lend money to startups will start with the security aspect of the loan. It is over and above the assurance provided by the federal Small Business Administration, SBA though their different programs that guarantee a portion of startup costs so that the banks feel the confidence to lend money to the startups with the government backing them. This reduces the risks of the banks.
· The bank will ask whether or not you have hard assets that you can pledge as collateral to back up your business loan.
· The bank will also look very carefully at the assets you wish to provide as collateral in order to make sure that it certainly reduces the risks and ensure the money will be recovered in case of any defaults.
For example, if you propose your Accounts Receivable as collateral for your loan, the bank will check all those major accounts receivables so as to make sure that those companies are truly solvent. Even if they are, the bank will only accept a portion of it which is often 50 to 75%, as your support for the loan.
On the other hand, if you get an inventory loan, the bank will make sure that this is not an old inventory. Once done, they will also make sure that only a percentage of the inventory is accepted and put in a lot of conditions on it.
All these warrants for collateral as personal assets which has a house equity and enables a startup to get a loan.
About your business plan
Though there may be some exceptions, banks will also ask for your business plan and include a draft of it along with your loan application. A business plan document can be short, as it is nowadays and even a lean business plan. However, the banks will need a few standard elements in the summary of you are the company that includes:
· The the product you deal with
· The market to target to operate in
· The team you have under you and most importantly
· The financial details and documents to support it.
However, it is important to remember at this point that having a proper business plan only will not guarantee that you will get the loan you desire. There are several other things the bank will want from you in order to be satisfied with you and your business.
Other elements required
The bank will also ask you about other things such as the financial details of your business. The list may include things like:
· All current and previous loans
· The debts incurred
· Bank accounts and statements
· The investment accounts and
· All credit card accounts.
Of course, with all these, you will need to provide all supporting documents such as tax ID numbers, complete contact information, address and phone numbers.
In addition to that, the bank will also ask about the details of your Accounts Receivable and Payable to check their credit. This includes:
· Aging and account-by-account info
· Sales information and
· The payment history.
It may also include the credit references from companies that you work with and are willing to vouch for your payment behavior.
In addition to all these, banks may also ask for all insurance information. Since banks are mostly concerned about reducing the risks involved in lending money, they will ask about the key founders and their insurance details in case of the deaths of one or more founders. In such situations, the bank will make sure that the insurance payout on death is directed to the bank first to pay off your debt and them to the beneficiaries.
Lastly, they will ask for the past returns and the copies of different agreements that you may have with different individuals and businesses of authority. The banks will see the corporate tax returns to deduce any fraud in it and the terms, conditions and future ratios of the founders mentioned in the agreement.
It is only when you satisfy all these details and answers the bank will consider funding your startup business.