The second you know you need to borrow money for your small business or startup might not be the second your business is ready to borrow.
Before you approach a lender for a business loan, you need to ask yourself a few questions about your business, long-term plans, and current needs. You should ensure you have a clear plan of action and to guarantee a simple process. Taking out a business loan is a long and tedious process–do it right the first time and save yourself a headache.
Before Taking Out a Business Loan, Ask:
Where will you get the money?
Business lending options basically include:
Government-backed Small Business Administration (SBA) loan
Bank/Other financial institution loan
Merchant services provider cash advance
Alternative lender loan
Do some research on each type of loan to find out which best suits your needs. There are tons of resources online that allow you to compare and contrast lenders, which can simplify your search and help you get the clarity you need before approaching a lender.
What will you need the money for?
Be prepared to answer this for yourself, but especially for the lender.
Don’t simply list the reasons you’re thinking about taking out a business loan. Think about–and write down–your detailed 30-,60-, and 90-day plan of action for spending the money and using it to grow your business. Are you using the money to lease commercial property? Hire new employees? Build a new location? Expand your marketing team? Get detailed; that’s what lenders want to hear.
When will you need the money?
Is this an immediate financial need, or something you’re planning long-term that can be put on hold until you receive the funds?
Know when you’ll need the money and communicate this clearly to your lender. When it comes to borrowing money, surprises are almost never a good thing.
When could you pay it back?
Part of taking out a business loan is paying it back. When could you pay the lender what you owe–and can you pay it back at all? What will your monthly payments be, and for what amount of time?
Keep the loan interest in mind when you consider this question, and be honest with yourself. You don’t want to take out a loan that you will end up defaulting on!
How much money do you really need?
Based on the detailed plan you develop that details how you will use the money you borrow, you will need to determine how much money you need.
Don’t ask for more than you need. It lessens your chance of being approved, and it increases the burden of repayment once that time comes. Be conservative but realistic in your calculations and estimations.
How long have you been in business?
Has your business been around for 6 weeks? 6 months? 6 days? Your answer will be important in a lender’s decision to loan your business money, but being a new business doesn’t necessarily dash your chances.
What’s the current financial fitness of your business?
Once again, being honest with yourself is crucial here. The question is not “Will your business eventually be successful?” How are you doing financially right now? Is your financial situation relatively stable or completely chaotic? Lenders know you wouldn’t be taking out a business loan if you were financially snug, but they want to know the story your books tell.
What could you put up as collateral for the loan?
Do you own assets that are worth enough money to act as collateral, should you default on your loan? You’ll need to consider how you’ll manage to put up collateral for your business loan, even though it’s an unpleasant thought.
This exercise can help drive home the seriousness of the situation for many entrepreneurs. What are you willing to gamble your new business on?
Once you’ve answered these questions for yourself, you’ll have a better idea of what type of loan you’re best suited for and will know just what to say to your lender. Doing plenty of preparation beforehand will ensure you’re not caught off-guard when you speak to a lender about borrowing money to start or grow your business.