7 Questions to Ask When Choosing a Business Loan
As a small business owner, working capital is your lifeblood. Cash-flow management is crucial to your success, which sometimes means you need to take out a small business loan to keep the gears of your business whirring. Equipment replacement, new hires, scaling your business or gearing up for a big contract are all good reasons to start looking for a loan.
There are lots of funding options out there—which is both a good and a bad thing for you. It’s easy to be overwhelmed by the sudden plethora of emails, phone calls, letters and ads from lenders—how do you plow through the weeds and find the best deal for your business? Is there a clear winner or are they all similar?
We want to help you find the best way to do an apples-to-apples comparison of the loan options out there to help you make the most informed decision when choosing your business loan.
Let’s start by looking at the top questions you should ask when considering a lender:
The Total Cost of the Loan
Sometimes the true cost of a loan is not clear. To keep you from spending more than you anticipate, ask your lender about all the costs involved:
Q1. What is the total cost of interest you will pay over the life of your loan?
Your lender should be able to tell you in dollars, not just a percentage how much you will pay in the total cost of interest of your loan.
Q2. What is the total cost of fees you will pay over the life of your loan?
Your lender should also be able to tell you the total cost of fees in dollars not just a percentage. Fees could include origination fees, prepayment penalty fees, service or processing fees, late payment fees and wire transfer fees.
Q3. Is there a prepayment penalty you’ll have to pay if you decide to pay off the loan early?
Some lenders will charge a prepayment penalty fee if you decide to pay off the loan early. They do this to avoid loss of paid interest arising from prepayment or early payment. However, you may want to pay off your loan early to avoid paying interest.
The Track Record and Practices of the Lender
While your lender is conducting due diligence on your small business, you should conduct due diligence on them:
Q4. How do they want you to pay back the loan?
Is it a fixed daily, weekly, or monthly payment, or is the payment a fixed percentage of your sales? Also be aware that some lenders will add a reserve bid to the terms of your contract. This means that when sales are down, the lender will take a larger percentage of those sales to compensate for your business’s risk. Reserve bids on a loan make it harder on small businesses to get ahead.
Q5. How is their customer feedback on third party websites?
Check out their reviews on the Better Business Bureau (BBB), social media sites and TrustPilot to see what customers have said about them and how they resolve customer complaints.
The Requirements of the Lender
In order to secure your funding, lenders have certain requirements to ensure you pay back the loan in full:
Q6. Do they require a personal guarantee?
Having a guarantor on a loan is a standard industry practice and shouldn’t affect you personally if you are able to pay the loan back on time.
Q7. Is the loan secured?
If your loan is secured through a blanket lien or specific lien on your assets (such as your car, house, or equipment), it can lower your borrowing costs and help you get a larger loan amount. It does, however, tie up your assets.
Knowing the answers to these questions is the first step toward making a smart decision on a business loan or line of credit. StreetShares strives to be completely transparent when working with small businesses looking for loans. We want you to know the answers to all of these questions before taking a loan from us. Contact us to learn more.
This post was originally published on the StreetShares blog. Copyright © 2017 StreetShares, Inc. All Rights Reserved.
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