8 Questions You Must Ask Your Potential Business Lender
Note: This is the second guest post by Adam Hoeksema, founder of ExecutivePlan, which helps entrepreneurs write business plan executive summaries to raise capital. More of his information is at the bottom. We’re excited to have him on the blog:
When microloan applicants ask me question after question about our microloan program, I undoubtedly disclose more information and tips that will help them secure a loan from our program.
If a potential borrower does not ask questions about our program I assume they are not serious about applying, and I try to waste very little time with them. I have included a list of questions below that I think you should ask when applying for a microloan:
1. Have you ever approved a loan for my type of business?
For example, some loan programs specialize in lending to technology based businesses, so they might not truly consider approving a loan for a restaurant. If the program has never funded a business in your industry, you will need to make sure that they actually want you to apply, or you are just wasting your time.
2. What is your average loan size?
If you come in asking for a $50,000 microloan from an organization that has an average loan size of $10,000, you may need to consider lowering your request amount. Ask why their average loan size is only $10k. Is it because they have not received larger requests? Or does the program prefer to fund smaller loan requests?
3. Who approves or denies the loan application?
It is a good idea to understand who your audience is for your loan application. They might tell you exactly who the decision makers are, and you might even be able to talk to them individually about your loan application to help build trust and credibility. You need to know your audience so that you can tailor your application to appeal to them directly.
4. How long does the process take?
Sometimes it can take up to 6 weeks from the time you submit an application to the time you receive a check. You might need the funding in 2 weeks, or else the loan would be worthless. If this is the case, you might need to look for other funding sources.
5. Can you make more than 1 loan at a time to a business?
Initially this might seem like a strange question, but it is a very important question. You see, if the organization is able and willing to make more than one loan at a time to a business you can request a smaller loan now, and a second loan in the future. Typically you would be more likely to gain approval with a smaller loan request, and if you do well with the first loan for 6 or 9 months you are likely to be approved for a second loan. The microloan program I manage has made 2 microloans to multiple businesses in the past, in fact, we prefer to work this way because it lowers our risk.
6. Are there application or closing fees?
It is important to ask this up front. You don’t want to go through the entire process, get approved for a loan and then find out there will be a $750 closing fee. Especially if you just don’t have $750 in cash right now to be able to pay the closing cost.
7. Is there an early payback penalty?
It is important to know whether or not you will be penalized for paying back the loan early. If there is an early payback penalty, you might want to request a shorter payback period. Although I don’t this for a fact, I suspect that most microloan programs are just happy to get their money back, so they probably will not penalize you for paying them back early.
8. Do you require a personal guarantee?
Many microloan programs will require a personal guarantee. This means that if the business were to fail and could not make the loan payments, you, the business owner would then be required to make the loan payments, or risk major damage to your personal credit score. A personal guarantee is a common requirement because typically small businesses lack credit history, so the loan is essentially being made to the business owner.
Asking these 8 questions will give you a huge advantage as you work through the loan application process. The more you can get the loan officer to talk, the better, so make sure to be prepared with a list of insightful questions that will show that you are serious about the process, and help you gather vital information to understand what the loan committee is looking for.
About the Author:
Adam Hoeksema is the Founder of ExecutivePlan and co-founder of StringHub. ExecutivePlan helps entrepreneurs and small business owners write powerful business plan executive summaries in order to raise capital. Adam is also the author of the e-book How to Secure a Microloan for Your Small Business.