6 questions to ask before taking out a business loan
Top questions before taking a business loan
- How much money do I need?
- Will my business qualify for a loan?
- Do I qualify for an SBA loan?
- Are there lenders that specialize in my industry?
- How long will it take to access the money?
- What are the loan conditions?
Most small businesses need a loan at some point, be it a cash injection to get through lean times, financing to purchase new equipment or paying for a renovation project. There are a variety of business loans on the market, so to ensure you find your ideal business loan, answer six questions when comparing lenders.
1. How much money do I need?
Identify the amount of money required, how you intend to spend the loan and the desired term — short, long or revolving. This will dictate whether a conventional term loan, working capital loan, equipment financing loan or other specific type of business loan makes the most sense for you.
2. Will my business qualify for a loan?
Credit, time in business, liquidity and available collateral influences business loan eligibility.
- Credit. A business’ credit score and that of its owner are distinct but related figures, particularly if past business loans were secured with a personal guarantee. Check your small business and personal credit scores, and work to strengthen them if time allows. In many cases, lenders check the personal credit score of the owner when assessing business loan eligibility, particularly if a small business has not yet built sufficient credit. Even if your company has strong financials, an owner’s bankruptcy or poor personal credit can influence the decision. Typically, a personal credit score of 680 or higher is required for a conventional business loan.
- Time in business and liquidity. Most conventional lenders require at least two years in business and proof of profitability, as well as financial ratios that demonstrate an ability to repay debt obligations.
- Collateral. If your business does not have sufficient credit or liquidity to qualify for an unsecured loan, obtaining a secured loan using your capital assets, current assets or a lien as collateral is a common alternative. The decreased lender risk of a secured loan usually translates into lower interest rates.
3. Do I qualify for an SBA loan?
The U.S. Small Business Administration (SBA) guarantees several types of small business loans, generally at lower costs and more favorable conditions for the borrower. See if your financing needs meet the requirements. Loans include: SBA 7(a) small business loans, Certified Development Company (CDC)/504 real estate and equipment loans, microloans, disaster loans, or loans that cater to veterans and minorities. The SBA itself is not a direct lender, so you need to compare lenders that offer SBA loans to see what rates are available.
4. Are there lenders that specialize in my industry?
Many lenders offer special business loan programs catering to specific industries such as hospitality and construction, or professionals in high-earning fields such as medicine, dentistry, law and accounting. These loans can cover new practice startups, acquiring an existing practice, expansions and equipment purchases. They typically carry low, fixed interest rates, and oftentimes extend up to 100 percent financing.
5. How long will it take to access the money?
SBA loans and conventional business loans typically offer the best rates and conditions, but require substantial paperwork. Before you start the application process, discuss with a lender whether your business is likely to qualify for a loan. Depending on how quickly you need financing, it may not be worth applying for a loan that may take several weeks to fund; there may be other viable options available to you.
There are faster-funding loans on the market such as the SBAExpress loan under the 7(a) loan program, which grants approvals within 36 hours, or working capital loans and alternative financing providers such as cash advance and invoice factoring companies.
6. What are the loan conditions?
Compare monthly payments and interest rates in relation to loan terms when deciding on the most economical loan for your business situation. In addition to assessing the loan’s Annual Percentage Rate — the annual cost of interest rates and all associated fees on the loan expressed as a percentage — make sure you are clear on any additional charges and fees.
Know when loan repayments will begin and how often you will make payments. Alternative financing such as cash advances often involve third parties such as credit card processors in the repayment procedure, so it is important to understand all the stakeholders involved to avoid missing a payment. Business loans are meant to bolster growth and offer opportunity for your company, not cause further financial strain. The bottom line is whether your business can afford to repay the loan given all the conditions. Make sure you know what those are.