You will need to show a business plan that leads to action. How does the loan you are asking for fit into your company’s overall strategic plan?
Questions that you will be expected to answer about your business plan include the following. Your answers will need to be precise.
- Where are you going to find your clients?
- How did you choose your location?
- Where are you going to find your suppliers?
- How many customers do you expect in a day?
3. Your financial strength
A banker will want a detailed break down of your financial projections for at least the first year of your operations and up to two years. For example, if you say you are going to have 100 clients a day and they’re going to spend $10 each, then you will have $1,000 in revenues. How much do you expect to make in your first year?
Your personal credit score is extremely important because it’s often the only major factor that a bank can assess for a start-up business. A poor credit score is a red flag for a bank and could make it a lot harder for you to get a business loan.
4. Your guarantee
For a start-up business, the bank will typically ask you to sign a personal guarantee, which makes you responsible for the loan.
How much money can you invest?
The bank will also look at how much money you will be investing. This makes your personal net worth important because the bank needs to see that if you aren’t going to take a salary for six months that you can afford to do so.
Can you meet your personal obligations, rent or mortgage payments for example, without drawing on revenues from your business?
Most of the time the reason why people don’t succeed is because of the lack of their own cash. We want to make sure that you can re-invest in your business if something doesn’t go as planned.
Common mistakes made when applying for a loan
A banker reading through your documentation is likely to get tripped up by the following types of mistakes in your application:
- underestimating expenses
- underestimating how long it will take to make a profit
- underestimating how much you will spend on marketing your new business
- no financial cushion
Don’t forget that you need to market your new business
Leteinturier-Guissé says marketing is extremely important because new business owners often believe that their idea is so great that customers will automatically flock to their business.
“People always underestimate how much they have to spend on marketing. That’s one place where people should overestimate. Once the business is open you need to spend money to let people know where you are,” she says.
Learn from your experience
A positive answer is never guaranteed, but solid preparation will help you improve your odds of getting a loan for your start-up business.
Even if the answer is negative, you can learn from the experience. That should help you make improvements and increase your chances the next time. Your job is to make it easy for a banker to lend you money.