
8 Important Questions to Ask Before Taking Out a Business Loan
Whether you've been helping customers for decades or are just starting your first venture, you may need to take out a loan to help build your business. But, taking out a business loan is a delicate process that requires careful consideration.
The thought of taking out a loan (or even multiple loans) might scare the daylights out of you. After all, it’s a big step of being in business. But, sometimes your business needs that extra helping hand to be able to grow and succeed.
Choosing to take out a business loan isn’t always an easy decision, especially if you have other debts to worry about. Before you take the leap and apply, ask yourself these eight business loan questions. And as always, make sure you consult your accountant before making any moves.
8 business loan questions to ask before applying
1. Do I really need a business loan?
First and foremost, you need to ask yourself this oh-so-important (and maybe the most important) question: Do I really need a business loan? The last thing you want to do is take out a loan when you don’t have to. You should never take on additional debt just for the heck of it. Not to mention, taking out loans can be risky, especially if you’re a new startup.
Determine if you really need a business loan first before making any moves. Explore all avenues before going down the loan path. For example, you can seek help from angel investors, friends, or family. Or, you can apply for a business credit card to help finance your business.
2. What do I need the funds for?
If you determine it’s time for you to take out a loan, the next business loan question to ask yourself is what you need the funds for. You may need the loan money to:
- Start your business
- Purchase new equipment
- Stock up on inventory
- Market your company
- Improve cash flow
- Expand your business
- Help recover from Covid-19 (e.g., PPP loan)
Narrow down exactly what you need the funds for. This can help you determine which type of loan is the best fit for your business. Maybe you’re just starting your entrepreneurial journey. If so, an SBA microloan may be a good place to start.
3. How much do I need to borrow?
Next up, you need to figure out exactly how much moolah you need to borrow. So, how do you go about doing this? Well, it depends on a few factors, such as:
- What you plan on using the funds for
- Your annual gross sales
- Existing debt
Writing or updating your business plan can give you a good starting point for determining how much you should borrow. A good business plan can help you manage your money and indicate what will be helpful to your small business. Plus, lenders typically like to have something in writing for why you need the loan and how you plan on paying it back.
4. What does my credit score and history look like?
Your credit score and history can make or break whether or not you can receive a loan. And lenders typically look at both your personal and business credit history and score. So before you begin the loan application process, ask yourself, “What does my credit report look like?”
Look at your business and personal credit scores and history before making any moves with a loan—especially if you’re new to the entrepreneurial world.
Consider requesting a credit report from a reputable agency. You may also be able to access credit reports from your bank or credit card companies. When reviewing your reports, keep in mind that the higher your credit score and the better your history, the more likely you are to receive a loan.
More articles from AllBusiness.com:
- How to Build a Company, and Then Sell It
- 10 Key Steps to Getting a Small Business Loan
- Understanding How to Navigate the Bank Lending Process
- How to Rebuild Your Credit After Bankruptcy
- Grants and Incentives Available for U.S. Small Businesses and Startups
5. When do I need the funds?
Do you need the loan funds ASAP? Or can you hold off for a little bit? How quickly you need the funds can impact which loan(s) you can apply for.
Some loans can be available within a day or two. Other loans, not so much. Depending on the type of loan you have your eye on, it can take weeks or even months for the lender to approve your application and distribute funds.
When looking into the different types of loans, consider how quickly you need the funds. But keep in mind that fast money usually equals expensive money (e.g., higher interest rates).
6. What other debt do I have?
Before you take on new debt, determine how much other debt you have. After all, you don’t want to take out more debt if you’re already drowning in it (and if you can avoid it). Not to mention, having a bunch of outstanding loans can affect your ability to secure another loan.
Take a look to see who you owe and how much outstanding debt you have. Compile a list of your debt. When in doubt, talk with a lender about your options.
7. How much is the loan going to cost me?
Before you apply for a business loan, read the fine print and ask yourself, How much is this loan going to cost me in the long run?
While looking at loans, consider the following factors:
- Interest rate
- Fees
- Penalties
- How much you’re borrowing
If you’re not careful, you may wind up paying much more than you realized and getting stuck with a loan you can’t afford. So my advice to you is: do your homework to know what you’re getting yourself into before taking out a loan.
8. How do I apply for a loan?
Believe it or not, applying for a small business loan doesn’t just happen overnight. It takes some time, paperwork, and in some cases, a whole lot of patience. So another important business loan question to ask yourself is how you go about applying for one.
To apply for a loan, you need to:
- Do your research on loan options (i.e., determine which loan you want to apply for)
- Review your credit information
- Look into getting a lender
- Gather necessary documentation for your lender
- Complete your loan application
Asking the right business loan questions from the start
Keep in mind that there’s a possibility that you may not receive a loan after applying. If you strike out, don’t give up. Instead, apply for a different loan or look into other financing options.
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