9 Things To Ask Yourself Before You Get A Business Loan

Sooner or later, most business leaders will need to take out a loan. Whether it’s to make ends meet during hard times, acquire a competitor or purchase pricey equipment, loans can be powerful financial tools.

With that said, loans can also work against you. Taking out a loan that’s too big, or one with unfavorable terms, could financially ruin your organization.

Applying for a loan is a serious decision. Carefully consider your options before you sign up for one. 

Ask Before You Borrow

You don’t want to find yourself in debt and out of business. Ask yourself these nine questions before you take out a loan:

1. Is a loan the best choice?

Loans are valuable for many businesses, but they aren’t always the best financing option. Consider all of them before you approach a lender.

An angel investor may be willing to provide you with direct funding. Your business may qualify for special grants. Or, you may be able to get some capital from a business partner. 

2. What types of loans are available?

Broadly speaking, loans come in two types: personal and business. Personal loans are riskier than business loans, which protect the borrower’s own assets, but offer more flexible funding options. For example, if you have a pending personal injury lawsuit, you can use a lawsuit loan to help fund your business.

There are also multiple types of business loans available. For example, you may want to set up an ongoing line of credit that you can tap into as you see fit, or you may prefer an installment or balloon loan. Be sure you understand the differences before you decide on one.

3. What does my credit history look like? 

Is your personal credit history spotless? What about your company’s credit history? Your credit scores and histories will play a massive role in determining your loan eligibility—as well as the interest rates you pay. 

If you’re looking for the lowest rate, consider spending more time improving your credit history. Paying your bills on time and in full is one of the best ways to boost your score.

4. Can I provide collateral or a personal guarantee? 

You can often get better loan terms by offering some kind of collateral or a personal guarantee. This means that if you fail to pay the loan, the bank can seize the asset or take action against you to recoup their funds. It’s a bigger risk, but it could play to your favor. 

5. How much can I afford to pay per month?

The larger the loan and the shorter the timeline, the higher your monthly payment will be. Can your business afford this? How might it impact your bottom-line profitability?

6. Will I need cosigners?

Cosigners are jointly and legally liable for the loan. If you’re running a corporation with multiple partners, most (if not all) of your partners will need to sign. Otherwise, you might consider attaching only one person.

7. Which lender should I choose?

Different financial institutions will offer you different deals, including different interest rates and terms. Shop around to get the best possible deal. Don’t be afraid to negotiate for a better rate—especially if a competitor is already offering one.  

8. How strong is my business plan?

Loans are risky. Are you certain your business model is going to generate revenue in short order and over the long term?

Most financial institutions will want to look at your business plan before lending money to you. They’ll look at figures like your monthly recurring revenue, expense, and other debt obligations. Make sure your plan makes a good impression before presenting it to a potential lender. 

9. What’s in the fine print?

Before finalizing any loan, make sure you read and understand all the fine print. Business loans sometimes come with complex terms that can be tough to parse. You don’t want to be surprised months into the arrangement. Look for:

• Penalties assessed for early repayment.
• Grace periods, payment schedules and late payment fees.
• When interest rates will change, assuming it’s variable.
• What happens if you default on the loan.

If you’re still shaky on your financing options, touch base with your mentors or investors. Chances are, they’ve taken out a business loan before. Borrow their expertise, and they’ll make sure you don’t borrow your business into the ground.