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Financing: Questions the Folks Who Lends You Money Will Likely Ask

If you’re going to ask someone for money, they’ll likely have a lot of questions and you should be prepared to answer them. We’ve said before that it’s not absolutely necessary to have a formal written business plan, but you do need a fully articulated business strategy and be ready to answer the hard questions a lender should ask. The following list of questions is a starting point, but your particular business might have more specific issues that you should be familiar with. Remember, lenders may stick to relatively simple, but devilishly difficult to answer questions such as “Why do you think we should loan you this money?”, so don’t get so caught up in the details that you lose sight of the big picture.

Lenders often use the framework of the “Five C’s” to understand the creditworthiness of a potential borrower: Character, Capital, Capacity, Collateral, and Conditions. We’ve broken down the questions you should be prepared using this framework.

Character – The Firm & It’s Owners Reputation

  • What’s your personal background, how long have you been in this field, what made you enter the field?
  • What kind of training or experience does your leadership team have?
  • How are you personally going to make money until the business begins to be able to pay you?
  • What are the policies (governance, management) and procedures (billing, inventory management, etc.) the co-op has in place to ensure the business can succeed?
  • What is the credit of the business / founders like?
  • Does the business have a profitable operating history?

Capacity – Your Ability to Repay the Loan

  • How much money do you need, what will you use it for and how will this grow your business?
  • How will your business repay the loan – is the cash the business generates more than the debt service?
  • How would we get paid back if the business failed? (Is the collateral sufficient to repay the loan?)
  • Who are your customers, how do you (or will you) connect with them?
  • Why would anyone go with you, rather than your competition? (the answer to this should not be that we’re a co-op)
  • What is the location of the business, why did you choose it?

Capital – Money you bring to the table

  • What kind of equity investment are you making in the business?
  • If you’re an operating business, what kind of retained earnings does the firm have?
  • Will you be making a personal guarantee?

Collateral – The Strength of Your Balance Sheet

  • What kind of collateral does the business have?
  • Does the business have assets such as property or machinery to help to secure the loan.
  • What is your debt to equity ratio?
  • What is your current ratio?

Conditions – Your local and industry market conditions

  • What are the biggest competitive threats or obstacles facing your business, how do you plan to address them?
  • Who are your competitors, how do your prices and quality compare?
  • What is your firm’s marketing and outreach strategy?
  • What kind of market research did you do?
  • What is your capacity to make the product or deliver the service?
  • Most businesses fail, why is yours different?