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Updated: October 30th, 2019
The time has come to grow your business and gain scale. But in order to do so, you’re going to have to invest in new equipment, staff, or a building. The good news is thanks to the rise of financial technology, it’s never been simpler to get a business loan.
However, before you even complete that business loan application, there are some questions you should ask yourself and the potential lender. Some of them will have a direct impact on the amount you borrow or the duration of the loan. Below are some business loan questions to consider that will make the process go as smoothly as possible.
You might be able to determine multiple ways to direct your business funding. Pick one. This will help you choose features such as the type of business loan application you should fill out and the duration in which the funds will be repaid. One thing to always make sure of is that the funds are directed toward your business and not personal expenses.
Say, for example, that you plan to use the funding to purchase inventory. It would not make sense for you to commit to a long-term, multi-year loan if those items will stop generating revenue for you in a few short months. So in this case, an application for business funding in the form of a short-term loan, which can be anywhere from several months to a year and a half, will do.
But if you are making a major investment in something like veterinary equipment or to open a second storefront, a longer-term loan that’s repaid over multiple years could work. These are the sort of details that are helpful to know before filling out a business loan application.
A common business loan question is “how much should I borrow?” Striking a balance between how much you want and how much you need is key. The average size of a bank-issued loan is $500K to be repaid anywhere between three-and-10 years. When filling out an application for business funding with online lenders, the amounts can range from $25K to $500K for at least 6 months, and up to 5 years.
It may seem obvious, but if you don’t ask for enough in your business loan application, you might find that you’re no better off with the funding. You may even end up in a situation where you need another loan too soon, which could be costly.
On the other hand, if you shoot for a pie-in-the-sky amount that your company’s financial health can’t justify, you risk the possibility of not being approved or worse, taking on more leverage than your business can sustain. Weigh the various factors ranging from the type of equipment you need or the number of employees you want to hire vs. your revenue projections over the course of the coming months and years. This is where creating a business plan can be a helpful preliminary step and is one of the keys to submitting a successful application for business funding.
Prior to the Great Recession, you didn’t have much choice but to wait on the timetable that banks provide, which could amount to weeks. The rise of online lenders, however, has created more options. Now you can complete an application for business funding online in as few as 10 minutes and receive an answer in as quickly as 24 hours after submitting documents, or five business days in some cases.
If you can afford to wait and are looking to borrow higher amounts, a bank loan might be the way to go. There are steps in between, and the more prepared you are at the onset with your financial documents for the lender, the faster the outcome.
You can expect either soft or hard pulls of your credit score at some point or a combination of both. Keep in mind both your personal and business credit history can come into play when applying for business funding. Your credit score and cash flow remain paramount, but there are ways to provide a more comprehensive financial picture to a potential lender when filling out a business loan application. After the initial loan, you will begin to build a credit history that will make it easier when it comes time to access funding again.
For a secured loan, collateral might be required. For U.S. SBA 7 (a) loan, which could reach up to $5 million, collateral could include inventory, machinery, equipment, or accounts receivable. High cash flow margins can offset some risk for the lender because it gives them more confidence in your ability to repay the loan, even during a slow season. You may also want to check out your company’s Yelp reviews because a lender may look for anecdotal evidence of how customers view your business as well.
It’s always best to double check that the lender actually lends to your type of business as well as the industry you operate in. Before filling out an application for business funding, spend some time reviewing testimonials on a potential lender’s website to see the types of businesses they specialize in. If you’re unsure, check out the lender’s FAQ or shoot them an email early in the process so that you are not left frustrated.
As a business owner, this is one of the most important business loan questions to ask. The key thing to look for when assessing the various layers of fees on your loan is transparency. What you want to avoid is learning too late that there were hidden costs that you didn’t see coming. Learn upfront the annual percentage rate, or APR with a particular lender. Some are lower than others.
You might also expect an origination fee that helps to cover some of the logistical costs for the loan issuer. In the case of the Small Business Administration loan, entrepreneurs pay what’s known as a “guarantee fee” that you may not encounter with online lenders. Other possible fees that could arise could be for the business loan application, check processing, late payments, underwriting, and prepayment.
You might have additional business loan questions. Whether you decide to pursue a loan from an alternative lender or a traditional financial institution, remember to keep the lines of communication open. Even though you might be filling out an application for business funding online, that doesn’t mean there’s no human on the other side to respond to questions. At Funding Circle, we excel at customer service and assign every applicant their own dedicated account manager to answer any questions they have along the way.
Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.