5 Questions to Ask Before Applying for a Loan

Loans are often crucial for small businesses. Small business loans provide the capital business owners need to launch a startup or expand their current operation. Whether you’re established or just starting out, loans inevitably get brought up in big-picture discussions about the company’s financial future.

But there’s more to loan applications than simply filling out the necessary application and respective forms. Small business owners must consider many factors when determining if applying for a small business loan is the right decision. Here are five important questions you should ask yourself before applying for a loan.

1. Can I afford to take out a loan?

Before applying for a loan, assess whether you can afford one in your current financial position. Loans are a great option for funding small businesses, provided you’re able to meet the loan’s requirements as set forth by the lender. If you can’t, your business (i.e. you) could experience financial stress. Be aware of fees, penalties, and interest rates accompanying the loan as well.

2. How much money should I take out?

Assessing how much of a small business loan you need is a strategic decision because, after all, a loan is debt. Finding yourself in too much debt is harmful to your business, but applying for too little of a loan doesn’t provide the capital you need beyond startup. This is incredibly important because businesses are a higher risk of failure when they are not capitalized properly.

Calculate how much money you need to ensure you’re applying for the right amount. If you’re purchasing a franchise business, ask, the franchisor will be able to provide guidance on their fees from the FDD (Franchise Disclosure Document) Item 7. Expenses for operations, equipment, inventory, and marketing should be included in your calculations. This will ultimately depend on what you need the loan for, so create a solid plan – and look to financial experts for guidance when developing your plan.

3. Is my credit score good enough?

Lenders review credit score and payment history, among other qualifications, to determine a potential borrowers credit worthiness for a small business loan. Good credit history free from issues like charge-offs and bankruptcies, the more likely you’ll qualify for a loan. You can also request a free credit report from annualcreditreport.com or from most major financial institutions. Business owners can build good credit by paying balances on time and in full every month.

4. What are the repayment terms?

Before committing to a loan, discuss with your lender how frequently you’ll need to make payments make payments. Most lenders require payment once a month, but some may require a weekly, or even daily payment schedule. Some loans have early payment penalties; some do not. It’s important to have a full understanding of your loan committed prior to signing any paperwork.

5. Do you report to business credit bureaus?

You should also ask lenders if they report payment history to reputable business credit bureaus. Most lenders will do this. Borrowing from a lender who reports can boost your credit score and make it easier to apply for loans in the future.

Lastly, it’s important to remember loans fall in two primary categories: secured and unsecured. The requirements differ significantly between the two loan types in areas such as minimum credit score, interest rates and terms, collateral, cash injection, cash reserves, and funding timelines.

Applying for a loan shouldn’t be taken lightly. Before signing on the dotted line, every small business owner should make sure that loan is the best fit for their company. The loan experts at Tenet Financial Group can provide all the information you need to make an informed decision. Contact us today for help answering all your loan-related questions!