Small businesses today have more financing options than ever before. Yet, in this maze of options, it can be difficult to choose the right loan and the right lender for your business. The days of the bank being the sole provider of small business loans are over, and business owners need to carefully weigh their options. Before getting a small business loan, there are 11 questions to ask – three you need to ask yourself and eight you need to ask your potential lender.
Why do I need these additional funds?
This question seems simple enough, but it is often overlooked by borrowers. A survey of SME financing reveals that the most common reasons a small business seeks financing are: 1) to cover operating costs (44%) and 2) to grow, seize a new opportunity or acquire commercial property (56%). Identifying the purpose of your loan is an important first step, as it will help answer some of the other questions you will need to ask.
Among other things, the purpose of your loan will help you identify the term that suits you best. Business owners looking for additional capital to meet a short-term need, such as buying inventory for a quick sale, will benefit from a shorter loan term than those looking to make a longer-term investment. term, such as the opening of a new store.
Generally, the shorter the term, the higher the periodic payment, but the lower the total dollar cost. Long-term loans generally have a lower periodic payment, but the total dollar cost of accrued interest, or the total cost of the loan, will be higher (this is often true even if the annual interest rate of the short-term loan term is higher than that of the long-term loan).
How much money am I looking for?
The answer to this question should depend on the purpose of your loan. Although many believe in borrowing “as much as possible”, this is not necessarily prudent. It’s important to consider the costs associated with borrowing and to ensure that your business has enough cash flow to make your payments on time. Barry Moltz, Small Business Expert, advises asking for the amount needed to meet your current business needs (for example, the amount you need to buy new equipment or launch your new product) plus 10-20%. So you’re covered if expenses are higher than expected or income takes longer to generate than expected – but you don’t take on more debt than you can afford.
Figuring out how much you need can also help you decide which lender to go to. Over the past few years, many traditional lenders have refocused their attention on larger businesses and larger loans. Banks, for example, prefer to lend $500,000 or $1 million rather than $50,000. It’s hard to blame them, because both loans involve roughly the same administrative and regulatory costs.
Fortunately, many lenders specialize in smaller loan amounts, which are specifically aimed at small businesses. According to the Small Business Financing Survey , 57% of small businesses applying for a loan are looking for $100,000 or less.
When do I need the funds?
Your loan goal may not allow you to take your time. Waiting several weeks to get your loan approved could result in a high opportunity cost. For example, if you need additional capital to honor a contract with a new client, a loan process that lasts several weeks may cause you to lose a major sale.
Often times , quick access to additional capital is essential to take advantage of an opportunity to create additional return, or to meet a short-term business challenge. In fact, 63% of survey participants indicated that the speed of funding was the main reason they chose online funding.
Now that you know why you need funds, how much you need, and how quickly, you’re ready to talk to a lender. You understand your needs and are able to assess a potential lender based on their ability to meet your business needs.
Before getting a small business loan, ask your potential lender:
Many lenders specialize in specific industries or have identified industries that they will not work with. By asking this question upfront, you’ll avoid wasting time with a lender who won’t be able to help you, regardless of your financial situation.
Do you offer a loan term that matches my business needs?
As you have identified the purpose of your loan (your business need), you will know if you are looking for a short term or long term loan, and you will be able to recognize the types of loans that are right for you.
There are lenders who exclusively offer short or long term loan options. So, by asking this question, you can weed out lenders that don’t offer the terms you’re looking for and focus on those that do.
What are the interest rates and total cost?
When considering your small business financing options, you need to determine the costs associated with each solution. There are several pricing and comparison tools that can help you evaluate and compare different financing options .
The APR (annual percentage rate) is a way to compare loans. The APR calculation includes all fees, so make sure you are comparing an APR to another full APR and not just the annualized interest rate.
It’s also important to know what the total interest cost — or total dollar cost of the loan — will be. This is especially true when trying to compare loans of different duration. For example, if you borrow $10,000 and your total repayment is $11,500, your total dollar cost will be $1,500. The dollar cost can help a business determine if it can afford to borrow and easily compare the cost to the expected return on investment.
The launch of daily and weekly recurring payments is a departure from the more traditional approach of monthly payments. Many lenders (including online lenders) have moved to a more frequent rather than monthly payment schedule for several reasons. For the borrower, this spreads out the expenses over the whole month rather than having to make one big payment every month.
Some lenders let you choose between daily or weekly payments, so you can select the schedule that best suits your needs and cash flow.