6 questions to ask before taking on a business loan

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If you own a small business or are thinking of starting one, chances are good that applying for a business loan is in your future. Obtaining the financing necessary to fulfill your small business vision requires lots of hard work and patience. It also requires asking yourself the right questions ahead of time, which will help you avoid pitfalls and match your needs to a lender.

Today’s small businesses have more financing options than ever before. 

“Alternative lending is on an amazing tear,” said Levi King, Nav CEO and practiced borrower. “Explore what’s around you. You never know what new tool or piece of advice will be the game changer for your business.”

Here are six questions to ask before taking on a business loan.

1. How much money do I need?

You can’t be too meticulous when it comes to the question of how much money you need for your small business loan. A high estimate could mean higher interest rates and a longer period of debt, while a low estimate could leave you in the embarrassing position of having to admit to your bank that you miscalculated. 

Let’s say that you need $50,000 to hire new employees to help you finish a big contract. You apply for the loan and discover that you qualify for $100,000. Do you go for the latter, lengthening your repayment period and increasing your monthly payments, or do you stick to your plan and borrow only enough to take your business to the next level? It’s easier to maintain discipline when you’ve calculated your exact requirements beforehand.

2. How good are my business credit scores?

When The Wall Street Journal conducted a survey of small business owners about business credit a few years ago, it found that only one in three participants had looked up their business credit score. That is an amazing statistic because business credit scores often play a crucial role in small business financing.

Don’t assume that a great personal credit score and good assets are enough to secure the funding necessary to grow your business. A low business credit score could cost you the loan or prompt your lender to charge more interest. Having a low credit score doesn’t have to be a cause for despair, however. You can raise your score by making on-time payments to your vendors, removing inaccurate data from your business credit report and paying down debt. This will take a lot of work and patience, but the end result will be worth it. The stronger your business credit scores, the more funding options you’ll have.

3. Will I qualify for the business loan?

Before applying for a loan, find out if you meet the basic qualifications. Ask your bank or lender about minimum credit scores and cash flow requirements. Loans are like credit cards: Getting turned down for one today will it make it that much harder to get approved for one tomorrow. 

In addition, familiarizing yourself with the requirements of various lenders will give you a better idea of your options. Maybe a traditional bank route, with its rigid insistence on high credit scores and a detailed business plan, isn’t for you. Doing your homework before you apply will save you time and money. It might even open new doors.

4. Do I have all the necessary documentation?

No one likes paperwork, but showing up for a loan interview empty-handed or with insufficient documentation will hurt your chances of getting approved. SBA loans, for example, may require financial statements, projections, and years of personal and business tax returns just to get the application process started. Buckling down and assembling what’s needed will make it that much easier for you to apply for loans in the future.

5. Does the loan have a prepayment penalty?

Some loans will penalize you if you pay them off too early. Being forced to drag out a monthly payment process for a loan you could pay off right now can be frustrating, especially if you’re trying to build business credit. Try to avoid loans that punish you for succeeding.

6. Is money the only solution?

Let’s say that your coffee shop isn’t doing as well as you’d like it to. An equipment upgrade would definitely mean tastier coffee, and buying new equipment is fun. Is it really what you need to grow your business, though? Maybe what you need is a marketing campaign or a better location with more foot traffic. 

Before throwing money at a business challenge, it never hurts to seek other sustainable solutions that will keep you out of debt. Are you seeking a loan for an immediate fix, or are there long-term benefits as well? Take time to study your challenge from every angle. Even if it turns out that a loan is your best option, the process of looking for other solutions is valuable in and of itself.

This article originally appeared on Nav.com and was syndicated by MediaFeed.org.

Featured Image Credit: DepositPhotos.com.