Are you considering a small business loan? If so, there are some questions you should ask yourself to make sure you’re making the right move for your business.
What is the purpose of the loan?
It is important to ask yourself why you need the extra money. This question will help you determine the type of loan and terms that will best aid you in reaching your business goals. Matching your loan to your goals will result in manageable payments, a reasonable loan term, and a better overall experience.
How much capital do I need?
Once you have determined the reason you need a loan, it should be fairly easy to identify how much capital you need. It may seem smart to get your hands on as much capital as possible, but too much debt could negatively impact your business. Borrow only what you need; more capital isn't the solution for everything (even though it may seem like it) and can end up costing you in the long run.
Does my business have positive cash flow?
Lenders like positive cash flow because it shows you can repay your loan. If your business is losing money you will be determined a higher risk and it can be very difficult to get approved. Take a look at your bank statements and figure out if there’s more coming in than going out. This will help determine the payment you could afford.
How much debt do I currently have?
A reputable lender will always consider the existing debt a business has. Not only will they want to know how much you owe and to who, but they'll want to make sure you'll be able to repay both your existing loan(s) and the new loan. Your DSRC (Debt Service Ratio Coverage) is a good indicator of your ability to repay.
What does my credit profile look like?
Understanding your credit score is a major step when considering a small business loan because virtually every lender factors it into their decision. Both your personal and business credit profiles will likely be reviewed which is why it is vital to build and improve your small business credit score.
What is my payment history?
If you've had loans in the past, showing that you paid them off on time is an asset when applying for a loan. Past behaviours are a good indicator of future behaviours and having unpaid, late, or defaulted loans will make you less to get approved. If you have multiple loans to pay off or are carrying business debt on your personal credit cards a debt consolidation loan may be the answer.
There are small business loans designed for all types of businesses and situations. If you answer these questions and educate yourself on your options then you'll set yourself up for success.