5 Questions your Business Loan Lender May Ask When you Apply for a Business Loan

It is imperative to have sufficient funds for the smooth functioning of a business. However, due to certain circumstances, a firm may require additional capital. Such finance may be obtained from external sources.
Commercial loans have now become a popular financing option as it provides the necessary funds easily and quickly. Once the amount is disbursed, firms may use it to fund their working capital needs, initiate startup activities, and also for growth and expansion activities.
In order to avail of a business loan, it is necessary to fulfill the necessary eligibility criteria set by the financier. Lenders generally require applicants to have a good credit score, and the firm to have a strong financial standing. Financiers also ask certain basic questions to get a better understanding of the business.
Here are five questions lenders may ask applicants while applying for a business loan.
1. How much loan does the business require?
It is necessary that firms gauge the amount needed to fund their business activities. Borrowing an excess amount will lead to financial constraints in the long run as the monthly installments will be higher. On the other hand, borrowing a lower amount will lead to a further cash crunch. It is, therefore, necessary to determine the funds required and apply for a loan accordingly.
2. Does the business have any collateral to pledge? Generally, banks and Non-Banking Financial Companies (NBFCs) require collateral to be kept against the loan. In the case of non-payment, the lending institution seizes ownership of the asset till the outstanding amount is cleared. However, many NBFCs these days do not require borrowers to keep the collateral. Hence, firms without any asset holdings like land or property may easily opt for an unsecured business loan.
3. Is the firm financially stable?
Lenders require firms to submit their profit and loss account statement as well as their primary bank account statement. These statements reflect the financial position of the business. If the business has a sound financial standing, the lenders generally disburse the loan amount quickly without any hassles. This is because lenders perceive such firms as low-risk, which means that chances of default are lower.
4. What are the credentials of the applicant?
Banks and NBFCs also check the credentials of the loan applicant. This includes the net worth of the applicant and details of assets and liabilities such as home, investment accounts, vehicles, credit card payments, or any outstanding loan. Financiers also check the credit score of the loan applicant or co-applicant, if any.
5. What is the firm′s repayment ability?
The firm′s ability to repay the loan is a major factor that is taken into consideration while sanctioning a loan. Lenders run into huge losses due to such bad debts. Hence, banks and NBFCs check the credit score of the firm. Besides, lenders question the firm′s ability to repay if the business has no capacity to generate income. It is, therefore, necessary for a start-up to have a strong business plan, so as to assure the lender of generating profits in the future.
It is necessary to have accurate answers to the aforementioned questions. If the firm is well-prepared the chances of getting a loan approval are high. Once the lender is assured of all these aspects, the application is sanctioned and the amount is disbursed into the account. Firms may then utilize the received funds to propel the growth of their business.