Considering a small business loan? Before diving headfirst into the business loan world, it’s always a good idea to ask yourself some essential loan questions. Imagine it as the business equivalent of checking your compass before setting sail on a grand adventure.
In essence, deciding to take out a small business loan is a bit like gearing up for a thrilling journey. It can provide the extra boost your business needs, but only if you’re certain it’s the right path forward.
So, before you start knocking on lenders’ doors, let’s explore why asking these loan questions is an indispensable part of your entrepreneurial voyage.
Questions to Ask Yourself Before Going for Business Loans
The First Step Toward Smart Borrowing: The first questions are directed not at the lender but at yourself. What are your reasons for wanting to take out a small business loan? Do you need capital for expansion, equipment, or to acquire a new building?
These are pivotal loan questions because they set the stage for your entire borrowing journey. You need to have a clear and ironclad reason for adding a loan payment to your operational budget challenges. Business lenders will want to know what that reason is, and so should you.
Before you fill out a business loan application, here are some questions to ask yourself as you seek the right lender.
Why Do You Need the Extra Capital?
Will you be able to grow without getting extra capital via a business loan? If so, go for it. But, business loans are a better option than dipping into savings.
What Type of Loan Is the Right Fit?
With a term loan, you’ll have a fixed rate and a long repayment period. You may be better suited to get a line of credit, where you can typically borrow up to about $150,000. You can pursue a Small Business Administration loan, but SBA loan requests typically take a bit longer to process. Still, the SBA variable interest rate is typically lower, with long repayment periods.
You can shop for an online lender, where approvals are typically faster, even available on the same business day – but often the repayment terms are shorter than you’d get with traditional lenders, which means your monthly payment will be much higher. As always, with any contract read the fine print.
Some business owners consider using a business credit card instead of taking out a loan, but you should shop for a card with a low annual percentage rate.
How Much Money Do You Need to Borrow?
Yes, that’s the big question. As we stated, a series of small business loans will help you build a positive credit profile. If that’s your goal you can opt for seeking a small loan amount.
Part of your calculation for how much business money you need to borrow, is how much the monthly payment may be. This is something to discuss with a loan officer as you work through a loan application.
Also, expect to pay a loan origination fee, required by most lenders.
How Is Your Credit Profile?
Here’s the thing about your personal credit score. Lenders will request to learn your personal credit score when you make a loan application. If you have bad credit, a lender will be less likely to extend a loan, unless you can get a business associate or family member to cosign.
Successful repayment of a business loan does not improve your personal credit score. However, meeting the loan terms will make it more likely that you can borrow additional money if your business needs to change again.
How Soon Do You Need the Funds?
With a traditional lender, the application process may take several months. If you’re anticipating your financing needs, you can start the application process and get prequalified. It can’t hurt to be prequalified with a lender.
Even if you don’t borrow right away, you can lock in a favorable interest rate for several months. Also, if you don’t wind up taking out a loan, the renewal process to reapply with the lender or bank will be much smoother.
What Documents Will You Need to Gather Before Applying?
You’ll need personal and business tax returns for three years, to present to the lender or bank. Typically you’ll get a reply within a few business days – not the loan itself, but a response about the likelihood of you obtaining the loan for your business from the lender or bank.
How Do You Apply?
You can apply with an online application, or apply in person for loans. Some business owners advise as a general rule to apply in person with a traditional lender, such as a bank (member FDIC), which helps establish a personal relationship. The loan officer at the bank may help with your application, with recommendations expressed to assist you in the process.
With online lenders, the entire process takes place online. You upload documents as required by the lender, and you can possibly get same-day approval. But the total cost of what you pay back may be higher due to higher interest rates.
Table: Key Considerations Before Applying for Business Loans
This table is a handy reference for entrepreneurs and business owners to consider important factors before seeking business loans. By using the table, you can make informed choices about your financing needs and select the right loan for your business.
Questions to Ask YourselfConsiderationsWhy Do You Need Extra Capital?Determine if your business truly requires additional funding and whether alternatives like savings are viable.What Type of Loan Is the Right Fit?Choose the most suitable loan type based on factors such as interest rates, repayment periods, and approval times.How Much Money Do You Need to Borrow?Calculate the precise amount needed, factoring in monthly payment considerations and potential origination fees.How Is Your Credit Profile?Assess your personal credit score and consider cosigning options if your credit is less than ideal.How Soon Do You Need the Funds?Decide on the urgency of your financing needs and explore prequalification options for favorable interest rates.What Documents Will You Need to Gather?Prepare personal and business tax returns for the past three years, as well as other documents required by the lender.How Do You Apply?Determine whether to apply online or in person, considering the advantages of establishing a personal relationship with a traditional lender.
Should Small Business Owners Take a Small Business Loan?
Should you do it? If you’re just getting started, can you make do with a small personal loan?
Here are some factors to consider as you make such an important decision for your business:
Is it the right time to invest in your business? In other words, what’s the economic climate for your business? Heading into peak season, when cash flow is prime?Does a loan agreement fit into your business plan? Sometimes the most important thing to know about that business plan you wrote – is that it’s not etched in stone.Is it time to pivot to grow the business? Successful small business owners did this during the challenges of the pandemic. For instance, a restaurant that seated 50 customers pivoted to take-out meals. To do so, they revamped their operations, changing the menu, purchasing packaging and upgrading to contactless payment methods.Is it the right timing? Too many times, a small business owner waits until things are dire before seeking a business loan. Know that the loan process with business lenders can take time, and be proactive.Can “small” small business loans help build your credit score? Yes. If you make timely payments on a business loan that will bode well for your credit score, and make it more likely that you’ll be able to borrow a larger small business loan in the future.
Here is a video by UpMyInfluence that discusses “Small Business Loan Questions to Ask Before Borrowing” that you can check out after reading:
Lender Questions to Ask When Getting a Business Loan
Here are some questions you should ask any potential lender as you seek financing.
Does Your Business Type Qualify?
Some lenders specialize in financing startups, some refuse to extend funds to startups. Many lenders will factor in the type of business, and the economic forecast for that industry before they lend you any additional capital.
How Much Can They Lend Your Business?
If you have a “small” small business, such as a sole proprietorship or home-based business, you may not qualify for anything more than a “microloan” which is less than $50,000.
What Are the Interest Rates and Total Costs?
As always when you seek financing for anything, consider the interest rates and how much that could impact the amount of your monthly payment. Just a change of two percent or more in interest rate can make a big difference in your payment.
What Will Be the Payment Schedule?
The payment schedule for the small business loan is the date when the monthly payment is due and will list the number of payments that must be made.
When Is the First Payment Due?
Sometimes, there’s a grace period for the loan payment, giving you a month’s breather before the first payment is due. The grace period allows you to catch up and pay any fees that are associated with the cost of the loan. For instance, there may be application fees.
Does the Lender Require a Personal Guarantee?
The majority of the time, a lender will require a personal guarantee for an applicant who owns 20% or more of the business.
How Long Does the Application Process Take?
That can vary by lender, but as a rule for a traditional loan, you can count on waiting at least two months to have the application approved.
Will Your Payment History Be Reported to the Credit Bureaus?
That is not required by law. However, you can opt to have a report made to credit bureaus (especially if you’re making timely payments on the loan). And here’s additional information to tuck away – if you have a customer who isn’t making payments on a contract, you can make a report to credit bureaus about that.
What Happens If You Can’t Repay the Loan?
You’ll be considered in default of the loan if you’ve missed several payments, although policies differ by lender. If you’re going to miss one payment, your best course of action is to contact the lender immediately. If you’re upfront about having issues with funds, you’ll be more likely to be able to work out a catch-up payment plan with the bank or lender.
Questions Your Business Lender May Ask You
When you approach a business lender, you’ll also need to be prepared to answer a series of inquiries. These questions help lenders assess your creditworthiness and the suitability of your loan application. Here are some common questions your business lender may ask:
What is the purpose of the loan? Lenders want to know how you plan to use the funds.How much funding do you need? Be specific about the loan amount you’re seeking.What is your business plan? Expect questions about your business model, target market, and growth strategy.What is your credit score? Your personal and business credit scores play a significant role.Can you provide collateral? Lenders may ask about assets you can pledge as collateral.What is your repayment plan? Be ready to explain how you intend to repay the loan.What is your business’s financial history? Be prepared to provide financial statements and tax returns.Do you have a personal financial history? Your personal financial situation may also be considered.Have you considered alternative financing options? Lenders may inquire if you’ve explored other funding sources.
Being well-prepared to answer these questions can enhance your chances of securing the loan you need for your business.
What Are the Most Important Factors in Business Loan Application Questions?
Your personal income information does matter, even when you’re borrowing for a business loan. That includes your household income, based on your personal tax returns.
Here are other factors that a lender or bank will consider: your past and current business revenue, your predicted cash flow, the business’s outstanding debt, the business owner’s personal capital investment in the business, and any unused credit available, such as unused credit lines. Those are the same considerations you should review when you’re borrowing funds.
Evaluating Loan Terms and Conditions
Before taking the next step with a small business loan, it’s crucial to closely examine the loan’s terms and conditions. This involves understanding the interest rate, loan duration, penalties for late payments, and any prepayment fees.
Asking for a clear explanation of these terms can prevent surprises down the line and ensure that the loan aligns with your business’s financial capabilities and goals.
Delve into the specifics of the repayment schedule, the flexibility of payment options, and any clauses that could affect your business operations or finances in the future.
Understanding the Impact on Business Operations
Taking out a small business loan can significantly impact your day-to-day operations, especially in terms of cash flow management. Before committing, assess how the monthly loan payments will affect your operational budget.
Consider if the influx of capital will enable growth initiatives that increase revenue, thereby compensating for the loan cost. It’s also wise to ask about the lender’s policies regarding loan restructuring or payment deferment in case of financial difficulties.
Understanding these aspects will help you make an informed decision about whether the loan will be a stepping stone or a stumbling block for your business.
Assessing the Lender’s Support and Resources
When selecting a lender for your small business loan, inquire about the support and resources they offer borrowers. Some lenders provide valuable business advice, financial planning services, or access to a network of business mentors.
These resources can be incredibly beneficial for growing your business and navigating challenges. Ask the lender if they have case studies or testimonials from other small businesses they’ve supported.
Knowing the level of support you can expect from your lender can be a deciding factor in choosing the right financial partner for your business journey.
Considering Your Long-term Financial Strategy
Integrating a small business loan into your long-term financial strategy is critical for sustained growth and financial health. Discuss with your financial advisor or a trusted mentor how this loan fits into your broader business goals and financial plans.
Consider how the loan will affect your business’s debt-to-equity ratio, overall debt levels, and future borrowing capacity.
It’s also beneficial to explore alternative funding options that might be more suitable for your long-term strategy, such as equity financing, grants, or strategic partnerships. A well-thought-out approach will ensure that the loan contributes positively to your business’s future.
Preparing for the Application Process
The loan application process can be intricate and time-consuming. Prepare by asking the lender about the required documentation, the application timeline, and any fees associated with the application or loan processing.
Understanding the steps involved can help you organize the necessary financial statements, business plans, and other documents in advance, streamlining the process. Additionally, inquire about common pitfalls or reasons applications are delayed or denied, so you can avoid these issues.
Being well-prepared and informed will make the application process smoother and increase your chances of approval.
By addressing these essential loan questions before taking the next step, you position your business for a successful financial decision that supports growth and stability. Remember, the right loan, under the right terms, can be a powerful tool for expanding your business and achieving your entrepreneurial goals.
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