Borrowing money for any reason should always be handled with care and consideration. Nowhere is this more true than when you are taking on debt to start a business. Ideally, you're taking this money to not only be able to pay back the loan (including small business loan rates), but also turn a profit so you can stay in business.
Here are some things to ask before getting a small business loan. These include questions you should ask yourself as well as those you should ask your lender.
How Much Do You Actually Need?
First, you need to get clear on this so you don't bite off more than you can chew. Second, you'll likely need to show the lender why you need this particular amount of money - especially if you're trying to secure a small business loan from more traditional lenders like a bank.
Do You Want a Traditional Lender or a Smaller One?
The answer to this question may have more to do with where you're more likely to secure the loan. Traditional lenders like banks or large institutions usually prefer to give loans to larger companies. However, it's fair to mention that securing a loan through a traditional lender isn't completely impossible for a Main Street business owner - it's just a cumbersome process.
Several smaller lending companies have been established in an effort to solve this problem and ensure that small business owners get funding. The process is typically less cumbersome but it comes with another set of considerations - like interest rates and fees.
What are the Interest Rates?
Not all loans are created equal and interest rates are usually a good measure of this. Interest rates on business loans vary by type of loan and lender so it's important to ask what the interest rates will be upfront.
It's worth mentioning that while interest rates on business loans are an important factor, they are not the ultimate decider of what makes a good loan. For example, the loan could have a higher interest rate but less fees and penalties associated with it than the loan with a lower interest rate.
It's imperative that you get all the numbers up front so you can crunch some numbers and choose the best loan for you and your business.
What are the Fees Associated with the Loan?
This usually refers to whether or not you are refinancing your business in which case there will be a myriad of fees ranging from bank fees to attorneys fees. Even if you're not refinancing there may be some bank or processing fees involved.
Make sure to ask for a list of all the fees that are involved with the loan and calculate them into the total cost. Again, this will vary between lenders so make sure to shop around.
Is There a Prepayment Penalty?
Some loans have a prepayment penalty, meaning if you've paid off the loan before a certain date then you will be charged a penalty. Always ask if there is a penalty for paying off the loan early. Additionally, ask about the exact terms.
Are There Any Restrictions?
When it comes to getting a small business loan there may be restrictions about taking out loans with other lenders. It's not like a credit card where you can have several different ones. The answer to this question may even help you determine whether or not you're even ready for a small business loan.
If you find yourself in a position where you think you'll need several different loans then you may need to take a step back. Because of the nature of business loans and the restrictions placed upon them you need to make sure you have some financial flexibility.
Small business loans are a viable option for entrepreneurs who need funding, but they should never be taken lightly. By asking these important questions you'll be able to make an informed decision.