5 Questions to Ask If You’re Considering Taking Out a Business Loan

Business Loan

As a business owner, you may require an adequate amount of capital to shoulder various expenses. For instance, you may need funds to purchase inventory or raw materials, finance an expansion opportunity, or cover emergencies. This is where applying for a business loan makes a lot of sense.  

Essentially, a business loan refers to a type of loan used for business purposes, such as to finance capital expenditures and operating costs. However, like other financial services, navigating a business loan can be confusing and overwhelming, especially if you don’t know what to do in the first place.  

Before you get started with your application, below are five questions to ask yourself if you’re taking out a business loan: 


1. Why Do I Need a Business Loan? 

This is one of the essential questions you should ask yourself before applying for a loan for your business. Typically, having a clear idea of why your company needs funds can help you make sound financial decisions. The more you’re aware of your loan purpose, the more you can determine the amount you need, the type of business loan that suits your needs, the payment terms you want, and many more.  

For example, if you’re taking out a business loan to finance growth/expansion opportunities, then you need a considerable amount of money to cover the expenses adequately. Also, given the amount involved, you should consider the payment terms and the ability of your cash flow to handle the repayments.  

Thus, to ensure you make the right financing decision for your business, always ask yourself why you need a loan in the first place. That way, you can find out what’s best for the financial aspect of your business.  


2. What Is the True Cost of the Loan? 

This is another question to ask before getting a loan. Generally, a business loan doesn’t just include the principal amount and the interest rates. There are also other fees that can affect the overall costs of the loan, such as the appraisal costs, processing fees, registration fees, legal and accounting fees, and many more.  

Because of this, it’s essential to ask yourself about the true costs of your business loan to figure out how much exactly you’re repaying the lender. If you’re a bit confused about how these costs work and influence your loan, you can have the lender explain them to you. By doing this, you can determine if you can pay your loan back without causing financial trouble to your company.  

Luckily, many online lenders offer flexible interest rates for small business loans and lower fees. Hence, applying for financing for your business doesn’t have to be costly. All you need to do is conduct thorough research to find the right financing solution that suits your budget.  


3. Will I Qualify for a Business Loan? 

Typically, most lenders set some minimum qualification requirements for business loans. As such, it’s crucial to ask yourself whether you can qualify for a loan or not. By understanding your potential lender’s requirements, you can have a better idea of what type of financing your business can be eligible for. Depending on your qualification, the following are two common types of business loans that may be available to you: 

  • Installment loan: It’s a popular type of loan wherein you receive the total amount of the loan proceeds, but the repayments will be made every month, depending on your chosen payment term.  
  • Line of credit loan: It refers to a short-term loan that should be paid back quickly. It’s commonly used to buy inventory and fund working capital and other operating costs.  

As you can see, there are some options to choose from when getting a business loan. However, the financing available to you may be restricted by specific eligibility requirements. For example, if you have a poor personal and business credit score, you may be unable to qualify for a particular loan.  

Therefore, if you want to increase your chances of getting approval, check the lender’s minimum requirements and ask yourself if you’re eligible. If the credit score is the problem, it’s best to build it back up before you file in an application form.  


4. How Much Money Do Your Business Needs? 

If you’re planning to take out a business loan, it’s also essential to ask yourself how much money your company needs. Knowing the loan amount you need can affect your business in the long run. For instance, if you borrow less than enough, you may end up getting another loan in a few months, increasing your outstanding debts in the long run.  

However, if you take out more than enough, you may have difficulty paying steep monthly repayments. When this happens, there’s a likelihood your cash flow wouldn’t be able to cope up with your monetary obligations. To avoid this situation, you need to figure out the amount of money you need when thinking about applying for a loan.  


5. How Can I Repay the Loan? 

Another question you need to ask yourself is how you can repay your business loan. Generally, your ability to make repayments may depend on your loan terms, including the length of payment and other factors. For example, if you choose a shorter repayment plan, you can take advantage of lower interest rates, and you can pay your business loan as quickly as possible. If you go for a longer term, you’ll deal with high-interest rates and a greater risk of default.  

With that in mind, asking yourself about your ability to repay makes a lot of sense. Doing so allows you to figure out whether your cash flow can handle the repayments or whether you have assets and other collateral properties that can be used to pay your obligations when your business is down.  


Bottom Line  

If you think getting a business loan can be one of the ways to fund your business and keep it afloat, you should educate yourself about this financing option and how it can impact your bottom line in the long run. By keeping these questions in mind, you’ll know what to expect before you apply for a loan. Consequently, you can make good financial decisions necessary for your business’ growth and success.