6 Questions to Ask Before Applying for a Small Business Loan
Dan Levenson September 26, 2017
So, you’re finally ready to start the small business you’ve always dreamed of, or perhaps you’re hoping to expand your existing business. Either way, in order to get going, you’re probably going to need to secure a small business loan.
Here are some questions to ask yourself before applying for a loan. They will ensure that you’re able to set your finances up securely and get the loan paid back in a timely manner.
Question #1: Why do you need a loan?
Before you head to the bank, make sure you understand why you need additional capital. What’s the purpose of the loan? What will you be using the money to accomplish?
Whether you need to fund startup equipment or you need that capital to afford the first couple of months’ rent and advertising costs, make sure those funds have a designated plan. Not only will you need to share that information with your lender, it will help you borrow only the funds you need, rather than going deeper into debt than necessary.
Question #2: How fast do you need the money?
In some cases, you might need to secure a small business loan quickly. A new client, for example, could require you to acquire capital fast in order to meet production needs.
Make sure you have a good idea of the loan timeline that will work for you before you start looking for lenders. This will ensure that you aren’t trapped waiting for the bank when everything else is ready to move forward—and that you don’t miss out on potential business due to poor timing.
Question #3: What’s the total cost of your loan?
Don’t look at the loan just in terms of how much you’re taking out. You’ll also need to consider the interest you’ll be paying on it, which can be substantial over the loan’s lifetime. Take a close look at the total cost of the loan, what payments you’ll need to make on it, and how long it will take you to pay it back.
Question #4: What happens if you have to default on the loan?
You have every intention of paying the loan back. Unfortunately, good intentions don’t always make the universe swing in your favor. Make sure that you talk with potential lenders to fully understand the consequences of defaulting on the loan so that if the unexpected does happen, you’ll be prepared.
Question #5: Is there a penalty for early repayment?
Sometimes, instead of things going exactly the opposite way you anticipated for your small business, they go even better! Perhaps you’d like to pay your loan off early, while you have the capital. That will be one huge weight off your mind!
Unfortunately, some loans include a penalty for early repayment. Make sure that you know going in what to expect if you need or want to pay your loan off early.
Question #6: Does the lender you’d like to use give loans to businesses in your industry?
Depending on your industry, you may have to look for a lender who will cover your business. Even if you approach a bank that is known for approving loans relatively easily, it’s still important to be sure that they understand the unique needs of your business to get the type of loan that’s best for you. Don’t be afraid to meet with several lenders to ensure that you secure the best loan possible for your small business.
Securing a loan for your small business is often a big step. You’re ready to branch out, start something new, or do something bigger than usual. Make sure that you have the capital to do it!
In many cases, you will need to present a full business plan in order to sway lenders in your favor. Download our free small business plan checklist to help organize that vital information!