Ask any business owner and they will confess to their need for a loan. However, it is never easy to apply for one. Loan for business involves a lot of effort, time and risk. Add to that the pain of filling out huge amounts of paperwork without scope for error, duration of loan decision, perils of non-payment and skyrocketing rates of interest.
No prizes for guessing that this entire activity is a high-intensity effort. Here are 10 questions to ask before applying for a business loan:
- Does my business require a loan?
This question is your base. Many times, a business may want and need a loan to further its growth. However, business owners must be doubly sure that this is the only option before applying for a loan for business.
- What must my loan amount be?
Never consider a loan for businessif you are not absolutely sure of the amount you wish to borrow. While it is impossible to be thoroughly sure of the expenses your business will incur, it is possible to make a fairly close assumption based on statistics and projections. Statistics may comprise work undertaken in a month, clients’ usual payment cycles and your vendor payment cycles. Projections can include revenue/turnover and sales scalability. Knowing this will be of immense help.
- Am I sure to be able to make regular repayments once I receive the loan for business?
If you are unsure about your ability to systematically pay off interest apart from additional amounts to end your loan, it is advisable you think well before applying for one. While it is a relief to be able to receive a loan, if you cannot start paying it off little by little soon after, you have opened doors to an unwelcome situation and are where you were before applying for a loan. Such a scenario is best avoided.
- How eligible and likely am I to acquire a loan for business?
This is something every business owner must seriously mull over before applying, especially in the case of small business loans. The most effective way of identifying the likelihood of receiving a loan is to understand the requirements of your bank or lending body. The flip side of not considering this beforehand is that if your loan were to be rejected, your credit scores will be negatively affected, making it much more difficult to receive any loans in the future.
- Do I have all the documents required to apply for a business loan?
One of the most tedious aspects of receiving aloan for businessis that it entails a nearly never-ending series of paperwork. This also means that you have to be ready with every single document that may be required even before attempting to submit your loan application. Research proves that a whopping four out of five loan applications are rejected because of incomplete or erroneous documentation despite the business qualifying for it.
- How do I ensure that the loan will help my business grow?
If the money borrowed from a bank or any similar institution is not put to use for revenue generation, then loan repayment becomes difficult. Hence, after all the risks you take as a business owner, it’s imperative you channelize the loan money for income creation. It does not matter how urgently you may need this money to pay salaries, process other operational expenses or clear your personal debts—business loans are primarily meant to scale your business.
- How much money am I likely to get based on my collateral?
A common mistake that entrepreneurs make while applying for a loan for business is incorrectly assessing the value of assets that are going to be used as collaterals for loans. This error of judgement leads to an inaccurate calculation of the loan amount required and subsequently, irrational expectations from the loan source. Banks and similar institutions usually value your assets less than its actual value and only agree to lend an amount that equals to part of its worth.
- How good is my business credit score?
Business owners may often fumble with their business credit scores. If your scores are not up to the mark, that can and will affect your loan application. Outstanding payments reported by vendors or debts towards other lenders can result in poor scores.
- Is my personal finance healthy?
As entrepreneurs seeking a loan for business, it is important that your personal financial state is sound. When evaluating your loan application, the bank or lending institution studies your personal financial history in detail. They investigate outstanding loans (including student loans), failed mortgage payments, credit card liability, credit scores of previously owned businesses, etc. This information is a part of your global financial statement and is critical to understand your business’ creditworthiness until it grows to be of a substantial size.
- What are the specifics of loan repayment?
Whether you are applying for small business loans or a business loan for a large enterprise, you must be aware of every detail regarding it. Start by asking what the standard conditions are and evolve to more detailed and comprehensive terms. Interest rates, frequency of repayments, EMI split, pre-payment penalty, tenure of repayment and use of asset stated as collateral are some aspects you must be well versed with before seeking a loan for business.
Being well informed and prepared will ensure that you are in a better position to evaluate the loan options before you. This will help you pick a loan option that is most suited to your business needs.