Business Loans: 10 Questions to Ask Beforehand

If you own a small business, it’s essential to understand your alternative sources of finance when it fails to raise enough funds. Many business owners opt for business loans as a way of boosting their business finance.

Entrepreneurs borrow business loans for various purposes. One of the main reasons for borrowing funds is to take care of the unforeseen expenses (emergencies). Potential entrepreneurs also take out small business loans to get capital for starting businesses.

Before taking out a business loan, there are several questions that you should ask your lender or yourself. Asking questions is an effective way of evaluating various loan options to find the most suitable one.

Questions You Should Ask

1.      Why Do I Have to Borrow Extra Funds?

When taking out a business loan, it’s vital to understand why you need the money. That will give you a sense of clarity regarding your financial needs. For instance, the loan purpose can help you determine if your needs are long-term or short-term.

Business loans with a long-term repayment plan have low monthly payments. Short-term business loans, on the other hand, have higher monthly payments. However, the total cost of a long-term business loan is more than that of a short-term loan.

2.      Can I use a Business Loan for My Personal Use?

When borrowing funds, you have to explain to the lender why you need the loan. Business loans are used to finance business activities. But what if you end up with extra cash? Should you spend it on your personal needs, or return it to your lender as part of payment?

Some lenders don’t restrict you from using loans to take care of other financial needs so long as you make payments on time. However, some loans have a specific purpose. They include home loans, business loans, auto loans, and student loans.

3.      How Much Money Should I Borrow?

The amount of funds you should borrow depends on your business financial needs and the loan purpose. You ought to take out enough business loan that will increase returns on your investment. However, you should not borrow more than what your business need.

Knowing the amount to borrow can also help you to identify the right lender to approach. That is because different lenders offer varying loan ranges. For instance, if you need a business loan worth $500,000, you should borrow from the bank.

If you want a smaller business loan amount, you can borrow from lenders who specialize in such loans. Unlike banks, such lenders offer small business loans of up to $50,000. An example is an online business loan lender.

4.      What Do I Need to Qualify for a Business Loan?

When reviewing your loan application, lenders look at various factors to determine if you are eligible for a business loan. Such factors include your business revenue, personal or business credit score, financial history, financial reputation, and collateral.

You must have a good credit score to qualify for large amounts of money and better loan terms. If you’re using your business credit score, it has to be 75 or more (out of 100). Your business must be generating enough revenue to repay the loan on time.

5.      Can I Qualify for a Business Loan with a Bad Credit Score?

While a credit check is an essential part of the underwriting process, it may not contribute to the final decision. Some lenders offer small business loans to people with bad credit. However, it is difficult to get a loan with a traditional bank if you have a poor credit score.

6.      How Much Collateral Should I Use?

When taking out a business loan, you must provide collateral. The value of the property you use as collateral depends on the amount of money you are borrowing. It has to be worth the business loan because it acts as the security.

For instance, if your business is borrowing $40,000 for marketing and advertising, the cash value of the property you use as collateral should be at least $40,000. If you fail to pay off the debt, the lender will seize the property and sell it to recover the money.

7.      What is the Interest Rate of the Business Loan?

Before setting out for a business loan, you should compare the interest rates of several lenders to find the most favorable one. You don’t have to do that manually because there are many comparison tools here that can help you analyze difference financing options.

Besides interest rates, you should also consider the total cost of the business loan. One of the best ways of comparing the overall expenses is by calculating the annual percentage rate of every lender. That should even include all the loan upfront fees.

8.      What Payment Schedule Would Suit Me?

Different business loan lenders offer various repayment plans ranging from daily, weekly to monthly payments. While monthly payment is the most popular plan, most lenders have adopted the daily and weekly schedule to reduce debt burden at end-month.

If you choose the daily or weekly repayment plan, you must ensure that your business has a consistent flow of cash throughout the entire month. The payment plan is unsuitable for companies that depend on the monthly inflow of money.

9.      How Long Will It Take to Process a Business Loan?

Today, most lenders process business loans within a few days or weeks. However, some lenders like traditional banks have a lengthier underwriting procedure that may contribute to late approval and disbursement of funds.

With an understanding that borrowers need quick funding, online lenders offer loan approvals within 24 hours. You can also get the cash within two days after approval.

10. Must I Have a Business Plan to Get a Business Loan?

Most lenders that offer business loans require evidence showing that you’ll use the money for a business. A business plan is one of the documents that can serve as proof, especially when starting up a business.

If you have an existing business, some lenders may ask you to provide a summary of its nature. If you are planning to expand the company with the loan, you may have to issue an expansion plan.

Bottom Line

Since lenders consider numerous factors before giving out business loans, it is essential to research such elements before taking out a loan. That will help you avoid additional costs that you didn’t expect. Remember to compare various loan options to find that which will suit your business needs.