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:
do not fund business plans and if they do that will be against the banking law
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
market to target to operate in
The team you have under you and most importantly
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:
current and previous loans
accounts and statements
investment accounts and
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:
and account-by-account info
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.