5 Questions to Ask Before Taking Out a Business Loan

Making a few simple queries before you apply for a loan will help ensure the best financial fit for both you and your company.

Here are 5 key questions to ask (and get answered) before taking out a business loan.

1. Have I explored all my financing options?

Many entrepreneurs make the mistake of defaulting to a business loan when they should be exploring alternative funding sources that could prove a better match for their needs.

Depending on your business, viable financing options might include:

  • Using a flexible line of credit in combination with a business credit card
  • Seeking monetary assistance from family, friends, or through crowdfunding
  • Pitching private sector or equity financing investors

If your money needs are the result of poor planning or cash flow meanwhile, make sure you take steps to correct these issues before taking on new debt.

2. Am I prepared to personally guarantee the loan I need?

According to BDC, banks generally need some kind of guarantee in the event your business can’t pay back its loan—and that could mean having to use your personal assets as collateral if your organization:

  • Is unestablished, credit-wise
  • Doesn’t own any physical assets (like property, equipment or a vehicle, for example)
  • Has yet to build up its accounts receivable or inventory

If you’re uncomfortable with the idea of being personally liable for your company’s debt—or if you can’t qualify for the financing you need—you might consider having someone cosign your business loan.

3. How much will a loan cost—and can my business afford it?

Before signing on the dotted line, you should thoroughly understand the interest APR (annual percentage rate) and payment amounts attached to the loan you’re taking on, as well as any closing, processing, or annual fees you’ll be expected to pay.

While a business loan may indeed turn out to be the best way to get the cash you need to purchase equipment or fund operations, it will contribute to your fixed costs—usually in the form of monthly payments.

Make sure you’re well-positioned financially to take on long-term debt, and don’t forget to talk to your lender about getting a better rate or payment terms (perhaps by opening a new chequing account and transferring your existing business deposits, for example).

4. Will I be able to change, pay out or renew the loan I’m considering?

Part of your due diligence should include finding out how easy or costly it will or won’t be to alter, extend, or eliminate your loan obligation.

Knowing what to expect financially will prove especially helpful if you’re ever:

  • Struggling to accommodate a shift in customer demand, or changes inside your industry
  • Considering a well-planned business pivot
  • Experiencing a major or disruptive event in your personal life

Ideally, you should look for a lender who offers ongoing support in terms of navigating business growth, economic stress, or an ownership transition—whether that includes selling your business or passing it along to a family member.

5. What information or documents will I need for my loan application?

Depending on the type of loan you’re after, you may be able to complete your application online, or it might require meeting directly with a specialized business lender.

Either way, be prepared to have a personal and/or business credit inquiry run, and to provide supporting documents like up-to-date tax and financial statements.

To increase the likelihood of your business loan being approved, you may want to consult with a professional accountant about your cash flow, growth strategy, and financial documentation before filling out your application.

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