Whether you’re talking to an SBA lender or any other lender, they all are trying to get the answer to basically three questions. They might not all ask the questions in the same way, but they are all trying to find out the same thing: Can you repay a loan? Will you repay a loan? Do you have a plan should something go wrong? You need to know what lenders want to know before you apply for a business loan.

Can You Repay a Loan?

They likely won’t ask it this way, but what lenders want to know is whether or not you have the means to repay a loan. They will want to know what your annual revenues are? And, they’ll look at your cash flow and to try to determine whether or not your business has the income that will be required to make all the periodic payments. The lenders that will be making small business loans right now, post PPP, will be very interested in your cash flow—which will be more important now than ever.

Every lender wants to be confident that you can make each and every periodic payment before they offer you a loan. What’s more, because they are all aware of the challenges many small businesses are facing right now, it’s probably safe to assume they will be skeptical and will likely want you to validate that the income and cash flow numbers you are presenting them are accurate. In addition to wanting to see your last three months of bank statements, they’ll want to see any additional information they can to verify that your bank statements are an accurate reflection of the cash flowing in and out of your business.

Don’t think of lenders as investors. They only make a return on their money if you make each and every periodic payment as agreed upon. The hard truth is that they aren’t looking for good ideas to invest in, they are looking for profitable businesses that demonstrate that they are able to make loan payments.

I once spoke with an entrepreneur who had a good business plan and a great idea. Unfortunately, he was very early stage, had no revenue, hadn’t established a business credit profile yet, and had a poor personal credit score. He didn’t know what lenders want to know and couldn’t figure out why nobody would offer him a loan. By the time he got to me he was pretty frustrated. Nevertheless, he wasn’t a good credit risk and nobody was going to lend him money. He didn’t have any means to make loan payments and couldn’t convince anyone that he did. If you can’t show a lender that you have a good track record, have revenue, and have any cash in your bank account, you aren’t demonstrating that you are able to repay a loan.

I suggested that he bootstrap for a while and build his credit profile so he might have better success down the road. When you apply for a business loan, be prepared to answer this question even if they don’t ask it this way. Be prepared to talk about your business’ profitability, your annual revenue, and how you manage your cash flow. Demonstrate your ability to make periodic payments with your bank statements and financial records that show there is cash available to service debt. You need to convince them that you can repay a loan.

Will You Repay a Loan?

This is a different question, something lenders want to know and is every bit as important. Over the last couple of months I’ve heard a lot of business owners complain that they were denied an EIDL or PPP loan because they had bad personal or business credit. Lenders use your credit profile to try to determine what you will do in the future based upon what you’ve done in the past. In terms of whether or not you will repay a loan, they look at your credit history.

For most small businesses, the harsh reality is that your personal credit score will probably be part of the equation—which was the case with many small business owners that were denied a PPP loan. The same will be true post PPP if you apply for a business credit card, a line of credit, or any other type of business financing.

For at least the foreseeable future, you should expect the credit requirements of many lenders to become tighter. For example, right now business credit cards are still available for new borrowers, but only the most creditworthy borrowers are qualifying. I don’t expect to see new lines of credit offered to many borrowers for at least the rest of this year, and many lenders have chosen to back away from small business term loans (at least for the short term), making it more important than ever to work on a less-than-perfect credit profile to bring it up to snuff.

There are lenders that will work with a borrower with a lackluster credit history, but you should expect to pay a premium. Most lenders have raised the threshold for credit scores they will work with, but many lenders use your personal credit score as a go-no-go metric to determine if they will even accept your application. For example, if your personal credit score is below 680 (640 for the SBA), the odds are very slim they’ll even want to talk to you.

In a post COVID-19 world, most lenders will understand the circumstances that could negatively impact an otherwise good borrower’s credit. Be prepared to explain what happened and the steps you’ve taken to correct the challenges that caused your credit problems. The better you are able to demonstrate that you will repay a loan, the odds of finding a lender willing to offer you a business loan increases.

Do You Have a Plan Should Something Go Wrong?

Nobody wants to think about worst case scenarios, but lenders do it every day. And lenders want to know that you have thought about it too. In an effort to mitigate the risk of making a loan, they spend a lot of time and effort thinking of what could go wrong and ensuring you have thought about it too—and have some kind of plan should it actually happen. That’s one of the reasons traditional lenders want to secure a business loan with collateral and why other lenders will file a UCC lien on your business assets. It’s why almost every small business lender I’m aware of will want a personal guarantee.

Over the years I’ve spoken with borrowers in default who were afraid they would lose their collateral and were scrambling to try to keep their assets—despite their failure to make their loan payments. Although there are some lenders that might try to help you, the reason lenders take collateral of some kind in the first place is to help them recoup the losses caused by a default. Collateral, a lien, or a personal guarantee shows a lender you have some skin in the game and will be less likely to default.

The best way to avoid this situation is to make sure you have the means to repay the loan regardless of what happens. Don’t gamble with borrowed capital. If you can’t show the lender that you are able to make timely payments regardless of what happens, it will make it that much more difficult to qualify for a loan.

Although different lenders may ask the questions differently, the answers to these three questions help them make decisions about whether or not to offer you a loan. If you can answer them to their satisfaction it will improve the odds of a successful loan application. If nothing else, you now know what you need to work on to improve your chances down the road.