Article Summary: Applying for a small business loan can feel like an ordeal if you're not prepared. Here are five questions you should ask yourself before you apply for a business loan to help you prepare and put your best foot forward.
Taking the time to thoughtfully evaluate and prepare before you meet with a lender may not be a guarantee of success, but it will help you improve the odds, so make sure and consider the following:
- Why does my business need financing?
- What are the minimum requirements to qualify for financing?
- Will the lender do a hard pull on my personal credit when I apply?
- What is the total cost of capital, interest rate, and APR?
- Will this lender report my good credit history to the appropriate business credit bureaus?
Asking yourself these questions will not only help you prepare for your application, it will also help you make decisions about any potential lender before you make a final decision. Keep reading to learn more.
There are a lot of decisions to make when you’re considering applying for a business loan. It can get confusing, overwhelming, and if you’re not careful, harmful to your personal credit.
So, before you submit any applications with potential small business lenders, I want to share with you these 5 essential questions to ask yourself and/or any lender before you even get started with the application… and why you should ask them.
1- Why does my business need financing?
The purpose of your financing will determine many of the factors that influence your decision making. If you know what your business need for financing is, you will be able to answer many of the other questions you’ll need. The reason, or your loan purpose, will determine how much you need, whether you should consider a term loan or line of credit, what payback options your cash flow can handle, and how quickly you need the money, are a just a few of the many other elements that will affect your financing decisions. These answers will help get you on your way to the best business financing options for your business.
2- What are the minimum requirements for getting financing?
Understanding a lender’s minimum requirements will help you narrow down the financing options that your business will likely qualify for. This will save you time and energy before you even get started filling out applications. (check out this cool chart comparing different financing options and their requirements)
3- Will the lender do a hard pull on my personal credit during my application?
Part of every financing application is an inquiry into your personal credit history. Some lenders, like OnDeck, can assess your creditworthiness by doing a “soft” pull, which does not show up on your credit profile and has no negative impact on your personal credit. So you can start the application process without impacting your personal credit score. However, some lenders do perform a “hard” pull on your personal credit and it’s recorded on your credit profile, which can be harmful to your personal credit and your ability to apply for financing elsewhere.
4- What is the total cost of capital, interest rate, and APR?
Once your business is offered financing from a lender, they will show you the rates associated with your loan. Many lenders and business owners only focus on the APR (Annual Percentage Rate) or AIR (Annual Interest Rate), but you should also ask about the total cost of financing so you can see exactly how much you’re paying back.
Fort short term loans, some annual rates (APR/AIR) can look confusing. Have your lender explain your cost as cents on the dollar (you pay back 7¢ for every dollar borrowed) or as the total cost of the loan. (will you pay back $11,000, $12,000, or $13,000 for a $10,000 loan). In addition to APR or AIR, these calculations make it easier to understand the true cost of the loan and you can make the best financing decision for your business.
5 – Will this lender report my good credit history to the appropriate business credit bureaus?
Some online lenders do not report your loan and payback habits to the major credit bureaus. If you want your good payback habits to have a positive impact on your credit-worthiness for the future and to build your business credit, confirm that any lender you take financing from reports their loans to the appropriate business credit bureaus. Read more about this.