At some point, nearly every small business owner finds themselves weighing the pros and cons of taking out a loan.
If you see an opportunity for adding value to your business that requires you to spend more capital than you have in the bank, a business loan may be your solution. But taking on more debt is a risky decision that requires careful planning.
At Fundera, people call us every day with questions about the loan process. I've heard them all-- from queries about credit pulls to how ownership affects your options-- but what stands out to me is how many business owners ask about the basics of getting a loan.
We help business owners answer important questions early on in the game, setting them up for success when they do apply for financing. Here are nine that we go over with entrepreneurs all the time, helping them do due diligence before taking on a loan:
1. Do I need a business loan?
This is the first and arguably most important question. You should never take on debt just to do it-- it needs to add value to your business or otherwise increase your return on investment. Only once you've exhausted your other options should you turn to a loan.
2. How much do I need and why?
Taking the time to write, or update, your business plan will help you answer this question. A plan for why you need this loan and how you'll pay it back in writing is usually required by lenders before you can be approved for a loan.
3. What kind of loan is best for me?
The lending world has diversified beyond traditional term loans from a bank and there are now a wealth of options offered by a number of different lenders-- such as online lenders that offer term loans, lines of credit, invoice financing and more. Maybe a business credit card will accomplish what you need instead of a long-term loan.
4. Can I qualify for an SBA loan?
Small Business Administration loans are considered the gold standard of small business loans. Dispensed by intermediary lenders but partially guaranteed by the SBA, these loans have low interest rates and long repayment terms.
The question is, do you qualify? Most customers approved for an SBA loan have a credit score of at least 680, annual revenue of at least $180,000, had been in business at least four years, and are willing to submit a litany of documents including tax returns, a business debt schedule, and profit and loss statements. Take a hard look at your financial history before you go through the process of applying for an SBA loan.
5. How quickly do I need funding?
The funding process when applying for a loan through a bank or via the SBA is measured in weeks and months. If your needs aren't pressing, it's worth waiting to see what they offer you. But if your issues are more pressing, online lenders can turn your application around and get you funded in as little as one business day.
6. Do I owe anyone else?
Having outstanding loans may affect your ability to get a loan, or how generous the terms of your new loan can be. Additionally, you can't use certain loan products-such as SBA loans-to pay off existing debt.
7. Are my financials strong enough?
Most loans, not just SBA loans, require you and your business to be in good financial shape for you to get a loan offer. That means decent-to-good personal and business credit and an established business that has consistent revenue; or, if you're a new business seeking a startup loan, collateral for a loan as well as proof of concept.
8. What is my business credit score?
Your ability to get a loan or a loan with good terms depends on you having a strong business credit history, so be sure to take a look at your business credit report. You may find an inaccuracy that you can clear up ahead of turning in your application.
9. What is the true cost of this loan?
The reality of small business lending is that every lender presents their offer to you differently. Some might neglect to show you the APR and instead just show you your interest rate, for example. Before taking out any loan, make sure you understand the exact amount you're borrowing, and what it really costs you, from origination fees to prepayment penalties.
These questions just address the basics of applying for a business loan. If you feel confident that the answers don't derail the possibility of obtaining financing at a good price, you can explore your options and see what works for you.