10 Essential Questions to ASk Before Getting a Small Business Loan
Before applying for business loans, consider the following questions. Getting a small business loan can be a great asset, but you should be prepared.
Getting a small business loan is a big step.
You aren’t only responsible for yourself and employees anymore. You are also responsible for paying back a lender what you borrowed from them.
It isn’t as easy to get a loan as you think either. Banks only approve around 26.9% of small business loans.
Do you know what you need to get your loan? This post will help you prepare.
Ask yourself the 10 questions below, so you know what to expect and what your business needs.
1. Why Do You Need a Loan?
Why would a lender give you money when you don’t know what to do with it?
Before you start applying for loans, come up with a solid plan for the money that you can show lenders.
When you show how your loan can help your bottom line, then it is safer to lend your business money. You have more of a chance to pay back the money you borrowed.
2. How Quickly Do You Need the Loan?
Are you looking for money as soon as possible or can you wait a few months?
When you can wait, the type of loans you can apply for start to go up. You have time to do more research and find better deals.
Quicker money means your options are more limited. You need to be careful because the deals you get aren’t going to be as good.
3. How Quickly Will You See ROI?
The purpose of your loan should lead to one thing: an increase in revenue. If what you’re doing with your money isn’t going to increase your bottom line, ask yourself if it is the best choice.
Calculating when you will see ROI as a result of your loan can help you decide on the type of loan you get.
If you see ROI quickly, then a short term loan may work better.
If your plan is more long term, then it may be better for you to apply for term loans that have longer payoff periods. This gives you more time to generate the cash flow to repay your loan.
4. How Much Money Do You Need?
Sounds like a simple question, right? Why not get as much as you can?
You might want to get the most you can get, but this might not be your best choice.
When you borrow more substantial amounts of money, that can come with strings attached. You could get a worse deal if you opt for the biggest loan you can get.
Figure out how much money you need to do the work you want to do. It’s okay to go a little more to be safe.
When you have a more realistic number, you are telling a lender that you have a plan for the money. It makes you a safer bet.
5. What Type of Loan Do You Need?
There is more than one type of loan. You need to understand the differences between them so you can pick the correct one. Here are a few that you can choose from.
A term loans give you a lump sum of money up front. You then repay the loan over time with interest.
SBA loans can vary based on the usage of your loan. Terms can change based on things like purchasing equipment and real estate.
Your repayment periods also depend on the loan’s purpose.
Line of Credit
A line of credit gives you access to funds as you need it. This limit is typically based on your credit limit.
You withdraw what you need, and you get charged interest on the funds you withdraw.
Short Term Alternative Loans
Term loans aren’t always the best option. They can take time to process, and you may not have that time.
A short term loan can provide you a quick influx of cash to handle any immediate needs. They come with a quick repayment window, so they work well when you can turn it around and repay the loan quickly.
6. What Terms Can You Accept?
Do you know how much your loan will cost at the end? Make sure you know how much you are willing to spend to take on your loan.
When searching for loans, pay close attention to interest rates and APR. You should be able to figure out how much money you will pay back for every dollar you borrow.
If you have trouble with this, then ask the lender to spell it out for you. This way you aren’t second-guessing your numbers.
7. Which Lenders Do Hard Pulls?
If you plan on applying for a lot of loans, you need to limit the damage to your credit from hard credit pulls.
A hard pull every now and again probably won’t hurt, but too many in a short amount of time could damage your credit history.
If you can’t get past hard pulls, then carefully choose which lenders you use to apply for a loan.
8. Do You Have a Backup Plan?
A business plan can look great on paper. But things don’t always work out.
If you are putting the success of your business on your loan, then it may not make you an attractive prospect for a loan.
Come up with a backup plan to present lenders. A backup plan will show them that you can still repay them if your plan doesn’t work.
9. Can You Risk Collateral?
If you don’t have fantastic credit, then it can be hard to find a loan that doesn’t require collateral. The question is, how much are you willing to risk?
You can provide collateral in two ways.
The first is specific collateral. If you default on your loan, then your lender reserves the right to collect everything laid out in your terms.
If you have a general lien, then a lender is allowed to take any business assets until they feel the value of the loan is satisfied.
10. Is My Business Stable?
Are you getting a loan to get out of a tight spot or expand?
Having a stable business can increase the chance of you getting your loan. Unstable companies increase the risk of defaulting on a loan.
Get your financial books in order so you can prove stability. Get your profit and loss statements, cash flow statements, and any other financial information ready to be examined.
Don’t Decide About Getting a Small Business Loan on a Whim
If you are getting a small business loan, don’t forget to prepare. You now have 10 questions to ask yourself to help make sure you get the loan you need.
There are a lot of loans available for you to get. Make sure you do your research on each one.
Have you answered these questions and ready to apply for a loan? Contact us today to learn how we can help.