If you are planning to get a business loan, then this might be the most important article you will ever read, and here’s why:
Did you know that the approval rates on loans, lines of credit, and cash advance applications are declining?
Fortunately, a few simple changes in your application can change that!
And in this article, I’m going to share them with you.
Many business owners struggle to get loan approval due to missing documents or information, cash flow limitations, or a damaged credit score.
Before applying for that business loan, did you know that a few simple questions can improve your lending experience and help you secure the loan?
For instance, a simple question, such as asking about your payment schedule, can help with budget planning.
With 25 years of experience as a financial coach and bank expert, I’ll show you the secret questions that will be key to getting that loan approval.
Asking the right questions to a potential lender is crucial to finding the most suitable financing arrangement.
In this blog, I’ll explain the essential questions you should ask your small business lender and why each is crucial to your business journey.
Before You Get a Small Business Loan, Ask Yourself:
In this day and age, small business owners have more financing options.
Business owners now do not depend on banks anymore for their loans.
But the problem is finding the right loan for your business.
Evaluating various loan types and lenders can be challenging.
If you’re a starting entrepreneur or small business owner, here are important questions you should ask yourself and your potential lender to ensure that business loan:
1. Can you really afford to repay your debts?
Before running to the bank or contacting your potential lender, ask yourself first if you really need a loan.
Asking yourself whether you actually need the loan should be the first question you should ask yourself, and it’s often overlooked.
You should first identify your loan purpose.
Determining why you’re actually getting a loan can help narrow down the different types of small business loans that suit you.
Without a concrete plan, having a large debt can be frustrating.
Analyze different loan options, current financial status, and intentions for loaning money.
Lastly, consider how the interest rates can affect your decisions on whether you’ll have enough cash flow to repay the loan.
2. How much money am I looking for?
Once you’ve decided, you’ll need to know how much money you’ll need.
It might be a very straightforward question, but a lot of business owners are naive and can easily be convinced that a lot of money will solve all of their financial problems.
By answering how much money you’ll borrow, your potential lender will have a clue on whether or not you’ve thoroughly thought about your loan purpose.
Don’t just borrow as much as you can since you have no idea when you’ll be able to borrow again.
Remember that there are fees and other costs connected with loaning money.
Ensure that borrowed funds will positively affect or increase returns on investments (ROI) or add value to your small business.
If not, getting a loan might not be a good idea.
Knowing how much money you need will also determine which lender to borrow from.
Nowadays, traditional lenders like banks are looking for bigger loans from larger businesses.
Fortunately, plenty of alternative lenders will cater to your needs if you only apply for a small business loan.
3. Is my credit profile okay?
Of course, your personal and business credit profile will affect whether you can get approved for your loan.
Your potential lender can tell if you’re responsible enough to be lent money.
A low credit score will grant you high interest rates and stricter terms, while a good credit score will benefit you with favorable rates and the best terms.
Even though your personal credit score is not the best way to measure your business operations, most lenders will still check it when reviewing your small business loan application.
Here’s a quick guide on credit score ranges:
- 800 to 850: Excellent
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Poor
Building and maintaining a good credit score can be the main key to achieving your financial goals!
4. How urgent do I need the funds?
Most business owners choose loans that have fast funding processes.
When applying for a loan, don’t expect to get a hold of the money quickly.
You’ll need to get approved first. And some loans will take weeks to get approved.
Now that you know your loan purpose, the amount of money you’ll loan, have reviewed your credit profile, and how quickly you’ll need the funds, you’re ready to talk with your potential lender.
10 Essential Questions To Ask Your Potential Lender:
Small business owners tend to use loans to power business growth and funding.
On the other hand, finding the right lender can also make the difference between having the best loan for your business.
Without further ado, here are ten crucial questions to ask your small business loan lenders:
1. Do you lend to businesses in my industry?
Ask your potential lender if they specialize in working within your specific field.
This question might be simple, but it can be a time-saver. This is important for business owners like you who value their time.
According to a study by the Electronic Transactions Association (ETA), the average business owner valued their time at $170.
Asking this question as early as possible will help save time with a lender who cannot help you.
2. What documents will you need from me?
Every lender is unique and might require different requirements for your documents.
But most of the time, lenders will need to see these requirements:
- Business plan
- Personal and financial information
- Business licenses and registration
- Financial statements
- Tax returns
- Current business financials
One benefit of choosing a lender familiar with your business field is that they’ll most likely ask for more specific documents relating to your loan application.
Asking this question early will help you prepare better and set up success for your business loan application.
3. What are the interest rates and the total cost?
Before signing any paperwork, you must know the interest rates, total costs, and other small business loan fees.
And if you don’t know these fees, hold up for a bit. I wrote an article about small business loan fees and how to avoid them that you should definitely check out!
Adding these additional fees to your knowledge is important since some are unnecessary and can be avoided.
You should also ask your potential lender about the closing fee. You wouldn’t want to get approved on a loan with a high closing fee on top of your other loan bills.
4. How long will the loan application process take?
As we tackled earlier, many business owners choose a business loan with a short application process.
However, depending on the lender, it could take anywhere from a day to weeks, or even months in some cases, to get approved for their loans.
For instance, getting approved for a bank or SBA loan usually takes about weeks.
On the other hand, online lenders tend to be faster, finalizing your application within a few business days.
And for those needing the money ASAP, some lenders can offer funds as quickly as within 24 hours.
5. What is your payment plan?
Before agreeing to anything, you should also ask about the payment plan.
Ask how you’ll pay back the loan. Some lenders might require larger monthly payments, while others are more lenient and will provide smaller amounts.
Nowadays, lenders have turned to automatic debits from bank accounts, while some still accept payments via paper check.
Ensure that you’re able to make ends meet and will be able to complete your payment easily.
A great follow-up question is asking what would happen if you could pay off your loan earlier than expected.
Why? Because some lenders will penalize you for repaying early.
Choose a loan and a lender with little to no prepayment penalty to avoid unnecessary added payments.
6. What will my payment schedule be?
Next, ask about what your potential payment schedule be.
Will you need to pay daily, weekly, bi-weekly, or monthly?
Knowing the frequency and amount will help you budget your finances.
Knowing the payment schedule can also help you determine whether you can make the loan payments.
Ensure first that you have consistent cash flow every month.
If your business’s cash flow is determined at month’s end, it’s best to avoid daily or bi-weekly payments to maintain business management.
7. If Approved, when is my first payment due?
Once you’ve been approved, the next question to ask is when your first payment will be due.
The first due date for monthly loan payments is usually the month following when you’ve taken the loan.
However, if you opt for the daily repayment schedule, your first payment will likely be the next business day after accepting the loan.
This way, you will not get caught off guard when you need to make your first payment.
8. Does the loan require a personal guarantee or collateral?
Depending on the type of loan and your potential lender, you might need to offer collateral.
What’s a collateral?
You pledge collateral, including real estate, cars, inventory, stocks, etc.
If you’re required to give collateral, ensure that you completely understand the terms before signing up.
On the other hand, lenders that don’t require collateral often want a personal guarantee instead.
A personal guarantee means the lender can collect from you personally if the business cannot repay the loan.
9. Do you report my credit history to the business credit bureaus?
Don’t always assume that your lender will report your good credit behavior to the business credit bureaus.
Why should you choose a lender that reports to the bureaus?
This crucial question is important if you want to maintain or build a good and strong business credit profile.
If you’re a responsible and smart individual, you would want lenders to report your payment performance to credit bureaus since it will positively affect your credit rating.
Remember that a good rating can help you obtain financial loans and make it easier to get approved for future loans.
If you want to build or maintain your credit score, make sure that you:
- Pay your bills on time
- Lower credit utilization
- Monitor your credit report
- Avoid multiple loan applications
10. Do you have any customer testimonials I can read?
Lastly, asking for reviews or testimonials from past customers is important to understand the kind of lender you’re dealing with.
Check for ratings and reviews from entrepreneurs or business owners who have previously worked with the potential lender.
Asking this simple question can give you an idea of others’ loan experiences with the lender.
Did they have any issues? How do they interact with borrowers?
Choose a lender you can trust to help grow your business in the long run.
Questions to Ask Your Small Business Loan Lenders: Summary
Are you ready to apply for that small business loan?
Use this blog as a checklist to ensure everything is set up.
Asking the questions above can make all the difference on your loaning journey.
Gathering all the necessary information about your business loan will make your experience great.
The world of finance funding can be confusing enough but don’t worry, I’m here to answer all your queries.
As a financial coach, I’ll help you navigate various loan options to help you make good-sounding decisions.