10 Questions To ask Before Taking Out a Small Business Loan

10 Questions To ask Before Taking Out a Small Business Loan

Investing is often very difficult without financing. Few entrepreneurs can pay out of their own pocket, and that is not necessary at all. In addition, it is suggested to keep a buffer for emergencies at all times. So, do you have extra working capital, and are you thinking of a small business loan? What do you have to pay attention to? You read it here! 

The costs, credit or loan, the type of financier, these are all things that you should think carefully about before taking out a business loan. Oh, and what about snags? Do you have an idea of all the consequences? By asking yourself and potential financiers the following ten questions, you can compare different loanfor SMEs and provide the necessary overview with which you can make an informed credit choice.  

First Ask yourself  

Before contacting the financier, here are questions to ask yourself:  

   1. What Purpose do I Want to Finance?

What is your purpose of taking the credit? Have you already looked at alternatives to raise additional capital? Sometimes a loan is not a good option. Suppose you need money to buy inventory that you then quickly sell, then the need looks very different from when you need resources to purchase a machine that you depreciate for years.  

2. Do I want a credit or a loan? 

In popular jargon, both terms are often used interchangeably, but in actual they are different. A small business loan is one amount that you receive in your account in one go. Business credit is an amount of money that is ready for you and that you can withdraw when it suits you. In one go, or always a part that you pay back and can also withdraw. Very different! The question is which type of loan fits the loan purpose you have chosen.  

 3. How much financing do I need? 

If you do start borrowing, then take it immediately as much as possible, even if you don’t need it immediately. Smart thinking, isn’t it? Our advice: turn it around. Don’t ask ‘how much can I borrow?’, But ‘what will a loan ultimately yield me? Calculate the ROI for different loan amounts. Does the ROI not increase the more you borrow? Then you have to think yourself whether you need such a large amount.  

 4. How Soon do I want To Have Access to The Loan? 

How soon do I want to have access to the loan

An important question to ask before taking out a small business loan. Do you need the money to buy in for a new customer within a few days? The financing requirement then looks very different than if, after much deliberation, you ultimately want to make a large investment in a new machine or a company car.  

5. How quickly Can I and do I Want To Repay The Loan? 

In other words: which financing suits your company? A shorter-term for a credit always works out better at the bottom line. Additionally, the pressure on your working capital increases if you want to repay the loan faster. Simply putting, the repayment frequency should match your cash flow. Think about the right balance in advance so that you can indicate to a financier how you see this for you and what the possibilities are within your company.  

Answer these five questions before applying for credit with a financier. You thus overcome the problem of financing that does not match your business, goals, and wishes.  

Questions to your financier

Once you have asked yourself the right questions to borrow money as an entrepreneur, it is time to contact the financier. Ask them the following questions:  

  1. Are There Any Industry Factors to Consider? 

Lenders always look at sector-specific risks in the assessment. It is, therefore, not only about you as a small business owner but also, about the general economic situation, what specific sector risks there are, how your company performs compared to the competition and how dependent you are on large suppliers or customers. Maybe you operate in an industry where it is not possible to apply for credit at all. Good to know in advance!   

2. Do You Offer a Repayment Term That Suits My Financing Needs? 

Do you offer a repayment term that suits my financing needs

Know about your business and the various available options. Based on this, you can determine how much you can repay at what time.  

A good balance is important here: it is not wise to deviate too much from the ideal repayment period for you. 

3. What are The Interest (costs)? 

Slick sales pitches abound, especially in the world of business loans. Do not let yourself be tempted and research the costs that you will actually pay when you take out a loan. We don’t just mean the interest costs. Lenders apply quite different additional costs. So don’t forget to ask about additional costs in addition to interest costs. This way, you avoid surprises. Let the best business loan broker help you with this.  

Note that a loan with short-term and high annual costs may ultimately be cheaper than a loan with a longer-term with a low annual cost.  

So do not forget that the total costs over the entire term can be cheaper than the annual costs.   

Tip: pay close attention to the interest rate. You can calculate the ROI of a loan by setting off the total costs over the entire term against the additional income you expect to generate.  

  4. What does the repayment schedule look like? 

Regardless of the duration, it is important to ask about the repayment schedule and what it looks like. Financiers are trying to be more flexible, but that also means that there is more variation in the repayment schedules. Adjust the repayment schedule to your business operations and the cash flow within your organization. Keep in mind that the earlier and more regularly you can repay, the cheaper the loan can be.  

5. How Long Does The Loan Process Take? 

You just want to know quickly where you stand when you take out a business loan. Check-in advance how long the application process will take so that you know where you stand.  

As an entrepreneur, make sure that you are well aware of the interest and costs, as well as other important conditions that apply. With the help of the questions, you will get a better picture of the business loan and the financier who is behind it. Take the help of your business loan broker in Melbourne to assist you.  

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