By Fernando Berrocal

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A great deal of effort and commitment are mandatory when getting your startup off the ground and flourishing. In addition, launching a startup can be highly expensive–not to manage the cost of your time.  Many aspiring business owners use personal or business loans–or even both–to finance their startup.

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They achieve this by using conventional methods or non-conventional forms of lending. Getting access to financing entails a difficult process, which includes answering some qualifying questions from startup lenders. In this article, we'll go over the typical inquiries that lenders pose to new business owners that they will work with. Remember: the answers to these particular questions may change depending on the sort of business you have–and the lender you choose to work with.

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What makes a business loan necessary for your startup? 

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When you apply for a business loan, the first and most crucial question lenders ask is:  what do you intend to spend the funding on? They pose this query for a number of reasons.  Lenders want a concrete sense of whether the funds will be maximized, so they can optimize the conditions and overall terms of the loan. In addition, certain business loans have predetermined limitations on how they might be applied.

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Loans from the Small Business Administration (SBA), must be used for approved business reasons.  Those can be raising working capital, buying inventory or equipment/machinery, or expanding a business. A lender can assist you to determine if the loan product you're interested in is a good match for your requirements.  They can also be a helpful resource if you're unsure of how you would use the loan itself.  Preparation and foresight are crucial here;  if you know what you're going to do with the funds, you won't borrow more than you need to. Be aware that late payments on loans can impact your credit score, since they are still debts.

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How much cash approximately do you require? 

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You must know that lenders will always inquire about the amount of money you require–regardless of the reason you’re seeking a business loan. And there are valid justifications for this procedure. To begin, they check to see if you're borrowing enough money to pay for your business expenses. The second thing they look for is a clear understanding of how you intend to use the loan amount.  Finally, lenders also want to make sure you aren't requesting more cash than you can afford.

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These questions allow lenders a chance to evaluate your level of financial literacy and knowledge. For them, if you can't explain why you need funding, or how much you'll need to pay for business expenses, it can be a sign that you're not ready to receive a loan. You have a better chance of getting accepted if you can demonstrate to the lenders that you are not borrowing more than you need.

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What kind of business do you have? 

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To choose the best loan product that you need, lenders consider the nature of your business. They might end up advising a line of credit (instead of an actual loan) if you need working cash to pay for goods or expansion. In addition, the nature of your firm may influence the type of security that lenders require. 

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For example, some industries found it more difficult to gain a lender's approval during the epidemic. In comparison with other industries, food, entertainment, and tourism found it more challenging to obtain loans. This was due to lockout measures–and the fact that few business owners could provide a clear repayment strategy for the loan. Whenever a lender asks you about the nature of your startup, just give an honest response. Clearly and concisely describe your organization's objectives, and how the loan would aid in achieving them.

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How long has your business been around? 

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Lenders are interested in knowing how long you have been in business, so they can assess the consistency and success of your starting business. The longer you've been in business, the more likely it is that things are going well. Lenders typically need information from businesses, such as a business plan and financial predictions. Due to the lack of a sufficient credit history for startups and small businesses (to evaluate their creditworthiness), lenders may want collateral to lower their risk.

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A collateral is a piece of property that can be used to secure a loan if you stop making payments. Assets are frequently utilized by borrowers to demonstrate their commitment to the loan's repayment and might take the shape of a mortgage, equipment, or invoicing. Keep in mind that small firms and startups are typically regarded as risky borrowers and as a result, may find it difficult to get authorized for a loan due to several issues, such as having a weak cash flow projection or a short credit history.

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Where do you envision your business in 5 years? 

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Lenders want to be certain that your startup has a clear strategy for making money. A strong business plan can help in this scenario. A carefully designed methodology will demonstrate your commitment to your venture–and your capacity to pay back any loans you take out. This type of plan can also help you understand any potential dangers and difficulties your business might face. This allows the lender to determine whether your startup would be a good fit for its lending offerings. Therefore, be ready to present your business plans to potential lenders if you're searching for a loan. It can be the deciding factor in a loan approval.

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In conclusion, it's helpful to consider the lender's perspective when looking for funding. It's vital to consider the possible questions lenders might ask–even before submitting your loan application. Therefore, make sure all of your requirements are ready even before that occurs. Understand your business, and prioritize your immediate needs. Even though seeking finance takes time and preparation, the benefits are  worthwhile.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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