Business Loans: Questions Lenders Ask Potential Borrowers

Questions lenders ask business borrowers

Lenders usually ask about the risk and viability of your business, according to Deepak Shukla, founder of Pearl Lemon Group. “They will want to know the financial condition of your business, its cash flow, revenue history and credit score,” he explained. “They can also ask how the loan will be used to grow or maintain your business, and what it will be used for. This information helps lenders determine if your company can make the loan payments.”

Here are the questions lenders typically ask potential borrowers and the reason behind each one.

How much money do you need?

This might seem like an easy question to answer, but many business owners are unsure of the exact amount. What’s worse, many don’t have a clear idea of how much they can afford to pay back. Borrowing more money than necessary can turn into a dangerous situation. 

Before you approach a lender, figure out how much money you truly need. Make sure your monthly payments won’t hurt your cash flow.  

The amount you want to borrow will also help lenders determine the right loan for you. If you’re covering startup costs of less than $50,000, a microloan may be the best option. If you need a larger amount of money to purchase equipment, equipment financing might make more sense.  

What do you need the money for?

There are many reasons small business owners need to borrow money. Some seek a short-term loan to cover a cash flow issue or to purchase extra inventory. Others want a long-term loan to bankroll an expansion. Lenders ask this question to match you with the right loan product. Many options exist, with varying terms and interest rates. When you tailor your loan to a specific purpose, it can lower the cost of borrowing and increase your chances of being approved.

For example, say a small business owner needs money for a longer-term project. The SBA’s small business loans provide low interest rates and long repayment terms. The paperwork is more arduous than it would be with other types of lenders, but it’s a better bet than borrowing against your invoices. 

How will you pay it back? 

Lenders want you to pay back the loan plus interest and will go to great lengths to ensure you can. That is why they require you to prove you can afford the loan. That means demonstrating that you have enough assets, cash in the bank and/or collateral to cover the loan, even if your business runs into trouble. When assessing creditworthiness, lenders also consider current and past loans and other business debts.

Do you have enough cash flow to service the loan? 

Being able to afford the loan on paper is one thing, but making the monthly payments might be another. Lenders want to ensure you have enough cash flow to service your loan. Businesses that make a profit have a better shot at getting affordable loans than those that don’t. “The first thing lenders zero in on is your cash flow,” said Andrew Lokenauth, founder and CEO of BeFluentInFinance.com. “They’ll dig deep into your monthly revenue, profit margins and operating expenses.”

Lenders ask about your business’s revenue and profitability to evaluate its financial health and the ability to repay the loan, said Chris Heerlein, CEO of REAP Financial. “They want to see that your business is generating sufficient income and is financially stable,” he explained. “A consistent revenue stream and profitable track record will reassure lenders that your business can handle additional debt without financial strain.”

What does your personal credit look like? 

Unless you’ve been in business for years, your company likely does not have its own credit score. Even if it does, that score may not be enough to satisfy lenders. That’s why most lenders inquire about personal credit when underwriting a loan. They want to make sure you don’t have too much debt outstanding and that you have a history of paying your bills on time. Your personal credit score usually dictates if you get approved for small business funding and at what interest rate. 

“Lenders assess your debt-to-income (DTI) ratio to determine whether your business can manage more debt,” Heerlein said. “A high DTI ratio indicates that a large portion of your income is already committed to existing debt, making it riskier for the lender to approve additional funding.”

If you have a record of being in business for years, recurring revenue and a strong credit score, you’ll do best with a bank. If you are just starting out or have questionable credit, there are many nonbank lenders that will be willing to work with you. 

How are you backing the loan?

Depending on the type of loan and the lender, you may be required to offer up collateral. Lenders figure that the more you stand to lose if you default, the more apt you are to repay the loan. Collateral can be paper assets, such as stocks and bonds, or property, such as real estate, vehicles or equipment. If your lender requires collateral, ensure you understand the requirements and inherent risks before you agree to the terms.

Even when lenders don’t require collateral, they often want a personal guarantee. That means they can collect from you personally if the business doesn’t pay back the loan. 

What makes your business different? 

Lenders want to know more than your elevator pitch. They want to make sure your business is viable. As a result, they will ask you about your business, what makes it different from its rivals, and how you plan to succeed and grow. This helps both with underwriting and determining the right loan for you. 

Small business loans play an important role in helping the nation’s business owners survive and thrive. While the cheapest loans are reserved for business owners with solid financials and credit profiles, there are many options for everyone else. If you understand what the lender expects from you, you’ll be better equipped to find the right loan type and provider. 

Tips for getting lender approval

By understanding what lenders look for and preparing thoroughly, you can significantly increase your chances of approval. Here’s what you need to know to make your loan application stand out.

Build relationships with lenders

Building rapport with potential lenders before you even need money can be a game-changer. This proactive approach allows you to establish trust and familiarity, making the lending process smoother when the time comes.

“Relationship building matters so much,” Lokenauth said. “I always tell clients to set up accounts at their target bank months before applying. My most successful client spent six months getting to know their banker through regular coffee meetings. When loan time came, approval was basically guaranteed.”

Practice your pitch

A well-rehearsed and confident pitch demonstrates your understanding of your business and its potential. Lenders want to see that you’ve thoroughly thought through your operations, market and competitive landscape.

“Practice your pitch until you can recite it in your sleep,” Lokenauth said. “You need rock-solid answers about your business model, market opportunity and competitive advantage.”

Have multiple funding options

Approaching lenders with the knowledge that you have other potential financing avenues can put you in a stronger negotiating position. This signals confidence and can encourage lenders to offer more favorable terms to win your business.

“When lenders see you’re talking to other banks, they tend to move faster and offer better terms,” Lokenauth said. “I’ve used this to negotiate interest rates down by two to three percentage points.”

Bring an exit strategy to the meeting

Lenders prioritize repayment, so demonstrating a clear plan for how you’ll pay back the loan — even in challenging circumstances — provides immense reassurance. This level of foresight demonstrates your financial responsibility and planning.

“Showing lenders exactly how you’ll pay them back — even in worst-case scenarios — has helped my clients secure approvals when others got rejected,” Lokenauth said. “Banks love seeing that level of planning.”

Present clear, accurate and up-to-date financial documents

Your financial documents are the foundation of your loan application. They provide a transparent look into your business’s health and historical performance, allowing lenders to assess risk and potential.

“Documentation is everything,” Lokenauth said. “Gather three years of tax returns, bank statements and legal documents before you even apply.” 

Be transparent about how the loan will be used

Lenders want to understand the purpose of the loan and how it aligns with your business growth. A well-articulated business plan that shows how the fund will contribute to your success builds confidence in your ability to repay.

“The lenders want clear proof of what you would use the money for and how the loan fits into your business plan,” Shukla said. “Ensure that your history is spotless and that all the paperwork is there. Being open and ready can go a long way with your credibility and demonstrate that you can pay it forward.”

Demonstrate your credit history.

Both your business and personal credit histories are key indicators of your financial reliability. Lenders will scrutinize past debt management and may require collateral to secure the loan. “Personal credit history comes up every time,” Lokenauth said. “I’ve seen perfect business plans get rejected because of a few late payments from three years ago. They’ll want explanations for any issues on your credit report.”

Ultimately, it’s best to stick with the basics. “Maintaining a healthy credit score, managing existing debts wisely and showing how the loan fits into your long-term strategy can significantly increase your likelihood of approval,” Heerlein said.

Danielle Bauter and Jennifer Dublino contributed to the reporting and writing in this article.