10 questions to ask before applying for a bank loan - part one

As an SME owner you may find that at one stage or another you need to apply for a bank loan to secure resources to keep your business flourishing.

Submitting a bank loan application can be a time consuming process so it's important you ask yourself the right questions in order to give your application the best opportunity to succeed. There are a number of things to consider before diving into a bank loan, that's why we've sourced 10 crucial questions, as suggested by Entrepreneur.com, that you should answer before sending in your loan application.

What is the likelihood I will qualify for a loan?

It's important to try and determine early on how likely your application is to be successful. The best way to gauge the success of your application is to contact your lending institution and enquire about the specific requirements need before applying.

If lenders check your credit report and deny your request it can actually have a negative impact on your credit score. As a result it will be even more difficult to borrow in the future because banks could look at that denial and decide that you're too much of a risk.

How much cash will I need?

Before applying for your loan it's a good idea to have a handle on how much cash you actually require. One way to determine the cash you require is to create a cash flow projection. This will help you align the requirements of your loan repayments with the terms and conditions of your customer's repayments. For example, if you have to make payments back to your lender in 15 days but your customers have 60 days to make payment; chances are you will need to borrow extra cash to meet your obligations.

How much is my collateral worth?

Many SME owners make the mistake of over valuing their assets and as a result will submit their applications with unreasonable expectations.

Lending institutions will always value your asset below the value you paid for it and therefore will only lend a percentage of the asset's value. The percentage can vary depending on the institution you are borrowing from and will generally be dependent on the age of the asset you are using for collateral. 

Is my cash flow healthy enough to repay the loan?

You will most likely have to provide your bank with financial projections for your business, so it's important your present them with a plan on how you expect to meet your payment obligations. Your cash flow represents how well your business is positioned to meet loan repayments so the healthier your cash flow is, the more likely you are to have your loan approved.

Do you struggle to understand your cash flow statements? Here are some tips to help you determine healthy signs present in your statement.

Do I need the loan?

A loan should be secured to increase business growth not fund operating costs. There's no point to borrowing money to cover operating costs as your business won't generate additional revenue and you will find yourself in a similar situation when your loan expires.

Before securing a loan identify areas of your business that can lead to growth, such as increased spend in sales and marketing, and then focus on using cash from the loan to improve those areas.

Want to read more? Watch this space for five more questions you should ask before applying for a loan - or try one of these useful links:

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