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Considering a small business loan? Before diving headfirst into the business loan world, it’s always a good idea to ask yourself some essential loan questions. Imagine it as the business equivalent of checking your compass before setting sail on a grand adventure.

In short, deciding to take out a small business loan is a bit like gearing up for a thrilling journey. It can provide the extra boost your business needs, but only if you’re certain it’s the right path forward.

So, before you start knocking on lenders’ doors, let’s explore why asking these loan questions is an indispensable part of your entrepreneurial voyage.

Here is a video by UpMyInfluence that discusses “Small Business Loan Questions to Ask Before Borrowing” that you can check out after reading:

The First Step Toward Smart Borrowing

The first questions are directed not at the lender but at yourself. What are your reasons for wanting to take out a small business loan? Do you need capital for expansion, equipment, or to acquire a new building? These are pivotal loan questions because they set the stage for your entire borrowing journey. You need to have a clear and ironclad reason for adding a loan payment to your operational budget challenges. Business lenders will want to know what that reason is, and so should you.

Should Small Business Owners Take a Small Business Loan?

Should you do it? If you’re just getting started, can you make do with a small personal loan?

Here are some factors to consider as you make such an important decision for your business:

  • Is it the right time to invest in your business? In other words, what’s the economic climate for your business? Heading into peak season, when cash flow is prime?
  • Does a loan agreement fit into your business plan? Sometimes the most important thing to know about that business plan you wrote – is that it’s not etched in stone.
  • Is it time to pivot to grow the business? Successful small business owners did this during the challenges of the pandemic. For instance, a restaurant that seated 50 customers pivoted to take-out meals. To do so, they revamped their operations, changing the menu, purchasing packaging and upgrading to contactless payment methods.
  • Is it the right timing? Too many times, a small business owner waits until things are dire before seeking a business loan. Know that the loan process with business lenders can take time, and be proactive.
  • Can “small” small business loans help build your credit score? Yes. If you make timely payments on a business loan that will bode well for your credit score, and make it more likely that you’ll be able to borrow a larger small business loan in the future.
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Questions to Ask Yourself Before Going for Business Loans

Do you need a business loan? Before you fill out a business loan application, here are some questions to ask yourself as you seek the right lender.

Why Do You Need the Extra Capital?

Will you be able to grow without getting extra capital via a business loan? If so, go for it. But, business loans are a better option than dipping into savings.

What Type of Loan Is the Right Fit?

With a term loan, you’ll have a fixed rate and a long repayment period. You may be better suited to get a line of credit, where you can typically borrow up to about $150,000. You can pursue a Small Business Administration loan, but SBA loan requests typically take a bit longer to process. Still, the SBA variable interest rate is typically lower, with long repayment periods.

You can shop for an online lender, where approvals are typically faster, even available on the same business day – but often the repayment terms are shorter than you’d get with traditional lenders, which means your monthly payment will be much higher. As always, with any contract read the fine print.

Some business owners consider using a business credit card instead of taking out a loan, but you should shop for a card with a low annual percentage rate.

How Much Money Do You Need to Borrow?

Loan questions - woman with a white background with question marks penciled in by black marker

Yes, that’s the big question. As we stated, a series of small business loans will help you build a positive credit profile. If that’s your goal you can opt for seeking a small loan amount.

Part of your calculation for how much business money you need to borrow, is how much the monthly payment may be. This is something to discuss with a loan officer as you work through a loan application.

Also, expect to pay a loan origination fee, required by most lenders.

How Is Your Credit Profile?

Here’s the thing about your personal credit score. Lenders will request to learn your personal credit score when you make a loan application. If you have bad credit, a lender will be less likely to extend a loan, unless you can get a business associate or family member to cosign.

Successful repayment of a business loan does not improve your personal credit score. However, meeting the loan terms will make it more likely that you can borrow additional money if your business needs to change again.

How Soon Do You Need the Funds?

With a traditional lender, the application process may take several months. If you’re anticipating your financing needs, you can start the application process and get prequalified. It can’t hurt to be prequalified with a lender. Even if you don’t borrow right away, you can lock in a favorable interest rate for several months. Also, if you don’t wind up taking out a loan, the renewal process to reapply with the lender or bank will be much smoother.

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What Documents Will You Need to Gather Before Applying?

loan questions - partners gathering and discussing documents gathered for business loan

You’ll need personal and business tax returns for three years, to present to the lender or bank. Typically you’ll get a reply within a few business days – not the loan itself, but a response about the likelihood of you obtaining the loan for your business from the lender or bank.

How Do You Apply?

You can apply with an online application, or apply in person for loans. Some business owners advise as a general rule to apply in person with a traditional lender, such as a bank (member FDIC), which helps establish a personal relationship. The loan officer at the bank may help with your application, with recommendations expressed to assist you in the process.

With online lenders, the entire process takes place online. You upload documents as required by the lender, and you can possibly get same-day approval. But the total cost of what you pay back may be higher due to higher interest rates.

Table: Key Considerations Before Applying for Business Loans

This table is a handy reference for entrepreneurs and business owners to consider important factors before seeking business loans. By using the table, you can make informed choices about your financing needs and select the right loan for your business.

Questions to Ask Yourself Considerations
Why Do You Need Extra Capital? Determine if your business truly requires additional funding and whether alternatives like savings are viable.
What Type of Loan Is the Right Fit? Choose the most suitable loan type based on factors such as interest rates, repayment periods, and approval times.
How Much Money Do You Need to Borrow? Calculate the precise amount needed, factoring in monthly payment considerations and potential origination fees.
How Is Your Credit Profile? Assess your personal credit score and consider cosigning options if your credit is less than ideal.
How Soon Do You Need the Funds? Decide on the urgency of your financing needs and explore prequalification options for favorable interest rates.
What Documents Will You Need to Gather? Prepare personal and business tax returns for the past three years, as well as other documents required by the lender.
How Do You Apply? Determine whether to apply online or in person, considering the advantages of establishing a personal relationship with a traditional lender.

Lender Questions to Ask When Getting a Business Loan

Here are some questions you should ask any potential lender as you seek financing.

Does Your Business Type Qualify?

Some lenders specialize in financing startups, some refuse to extend funds to startups. Many lenders will factor in the type of business, and the economic forecast for that industry before they lend you any additional capital.

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How Much Can They Lend Your Business?

loan questions - loan officer getting borrower to sign a loan contract

If you have a “small” small business, such as a sole proprietorship or home-based business, you may not qualify for anything more than a “microloan” which is less than $50,000.

What Are the Interest Rates and Total Costs?

As always when you seek financing for anything, consider the interest rates and how much that could impact the amount of your monthly payment. Just a change of two percent or more in interest rate can make a big difference in your payment.

What Will Be the Payment Schedule?

The payment schedule for the small business loan is the date when the monthly payment is due and will list the number of payments that must be made.

When Is the First Payment Due?

Loan questions - calendar with the payment due date circled.

Sometimes, there’s a grace period for the loan payment, giving you a month’s breather before the first payment is due. The grace period allows you to catch up and pay any fees that are associated with the cost of the loan. For instance, there may be application fees.

Does the Lender Require a Personal Guarantee?

The majority of the time, a lender will require a personal guarantee for an applicant who owns 20% or more of the business.

How Long Does the Application Process Take?

That can vary by lender, but as a rule for a traditional loan, you can count on waiting at least two months to have the application approved.

Will Your Payment History Be Reported to the Credit Bureaus?

That is not required by law. However, you can opt to have a report made to credit bureaus (especially if you’re making timely payments on the loan). And here’s additional information to tuck away – if you have a customer who isn’t making payments on a contract, you can make a report to credit bureaus about that.

What Happens If You Can’t Repay the Loan?

loan questions - person on phone with the bank taking notes

You’ll be considered in default of the loan if you’ve missed several payments, although policies differ by lender. If you’re going to miss one payment, your best course of action is to contact the lender immediately. If you’re upfront about having issues with funds, you’ll be more likely to be able to work out a catch-up payment plan with the bank or lender.

Questions Your Business Lender May Ask You

When you approach a business lender, you’ll also need to be prepared to answer a series of inquiries. These questions help lenders assess your creditworthiness and the suitability of your loan application. Here are some common questions your business lender may ask:

  • What is the purpose of the loan? Lenders want to know how you plan to use the funds.
  • How much funding do you need? Be specific about the loan amount you’re seeking.
  • What is your business plan? Expect questions about your business model, target market, and growth strategy.
  • What is your credit score? Your personal and business credit scores play a significant role.
  • Can you provide collateral? Lenders may ask about assets you can pledge as collateral.
  • What is your repayment plan? Be ready to explain how you intend to repay the loan.
  • What is your business’s financial history? Be prepared to provide financial statements and tax returns.
  • Do you have a personal financial history? Your personal financial situation may also be considered.
  • Have you considered alternative financing options? Lenders may inquire if you’ve explored other funding sources.

Being well-prepared to answer these questions can enhance your chances of securing the loan you need for your business.

What Are the Most Important Factors in Business Loan Application Questions?

Your personal income information does matter, even when you’re borrowing for a business loan. That includes your household income, based on your personal tax returns.

Here are other factors that a lender or bank will consider: your past and current business revenue, your predicted cash flow, the business’s outstanding debt, the business owner’s personal capital investment in the business, and any unused credit available, such as unused credit lines. Those are the same considerations you should review when you’re borrowing funds.

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