Before you get a small business loan, there are a few questions you should ask both your lender, and yourself. These questions can help you understand whether borrowing is the best choice for your business.
1. What do I need the extra capital for?
In other words, why do you need a loan? It seems like a pretty straightforward question, but it’s often overlooked by borrowers looking for extra capital. Articulating loan purpose will help answer some of the other questions you’ll need to ask.
Your loan purpose will help you identify whether you’re trying to fill a short or long term need. For example, the financing needs of purchasing quick turnaround inventory differ from those associated with expanding to a new location. It might not make sense to borrow with a four-year or five-year term to pay for inventory that will be sold in a month or two. The key is to match the term of the loan with the life of the asset you’ll purchase with the loan.
2. How much money am I looking for?
This is another pretty straightforward question. Unfortunately, popular culture has many people convinced that a lot of money will solve all their problems. It’s not unusual that, when asked how much they’re looking for, a borrower will reply with “as much as I can get”. However, this answer tells a potential lender that you haven’t really thought through your loan purpose. Your loan purpose should drive the answer to this question.
Borrowing as much as possible at any opportunity, just because you never know when you won’t be able to borrow again, is a questionable decision. There are costs associated with borrowing that should be thoughtfully considered. One approach is to determine the Return on Investment (ROI) that will result from the borrowed funds. If the funds from the loan will drive increased ROI, or add value to the business, a small business loan could make sense. Alternatively, if not, borrowing may not be as beneficial for your business. In other words, borrow what is required to fulfil your business need, but no more.
Determining the amount of money you need can also help you determine which lender to approach. Over the last several years, many traditional lenders may have moved upstream, looking for bigger business from larger loans. Banks, for example, would often rather lend $500,000 or $1 million, compared with $50,000. Both amounts carry about the same administrative and regulatory costs associated with underwriting the loan. However, in Australia, the alternative online lending market continues to grow, meaning even more options for small businesses when it comes to small business loans.
3. What does my credit profile look like?
Your credit profile makes a difference. Your personal credit score, business credit score and business credit profile can influence the success of your loan application. One of the biggest issues with credit is that many business owners are unaware of their business credit profile – in fact, over 90% of Australian small business owners don’t know their business credit scores.^ This means that business owners are often in the dark about their creditworthiness. Focus on building a strong business credit profile – this blog article is a great place to start. Many lenders have minimum credit score requirements, so being familiar with your score can help you determine the feasibility of using a certain lender. OnDeck, for example, have a minimum business credit score requirement of 500.
Some online credit checks can leave a negative footprint on your credit score. However, OnDeck’s free online ‘Know Your Score‘ tool, powered by Equifax, allows you to check your business credit score without it having an impact. ‘Know Your Score’ is immediate, and once you receive your score, there is no obligation to take out a loan. Find out more here.
4. How quickly do I need the funds?
Although this question is at the bottom of the list, it’s a very important question to ask. Some loan purposes don’t allow the luxury to wait for several weeks to gain a loan approval. For example, ramping up your ability to serve a new customer contract might require additional capital within the next few days. Waiting weeks for a loan could carry with it an opportunity cost that is too high.
Depending upon the lender, it could take anywhere from a day, to a few weeks – or even months. With OnDeck, you can receive a decision and funding in as fast as 1 business day. This means you won’t have to worry about wasting time waiting for funds, and instead you can get on with your business faster.
Ask the lender:
5. Do you lend to my industry?
Many lenders specialise in working with specific industries, or have identified industries with which they do not work. Asking this question early will help you avoid wasting time with a lender that won’t be able to help you – regardless of your creditworthiness. Look for a list of restricted industries, or industries the lender serves, on the lender’s website. If you can’t see your industry listed, you can always reach out to confirm with the lender before starting a loan application.
OnDeck: We serve over 700 industries, but unfortunately there are some industries we can’t serve. Check here to see if we serve yours.
6. Do you offer a loan term that fits my business need?
This is important. Once you’ve identified your loan purpose, you can determine whether or not you’re looking for a short or long term loan. In the same way most consumers wouldn’t purchase a new car with a 30-year auto loan, you can quickly determine if the loan terms are right for your situation. There are lenders that offer exclusively either short or long term loan options. So, if you’re interviewing a lender who doesn’t offer the terms you’re looking for, you’ll recognise it.
OnDeck: Our loan terms range from 6-24 months.
7. What is the payment schedule?
The advent of daily, weekly and monthly periodic payments is a departure from a more traditional payment approach. Nevertheless, many lenders (including online lenders) have adopted a more-frequent-than-monthly payment schedule for a number of reasons. Not the least of which is that it tends to smooth out the cash flow burden throughout the month, rather than the traditional cash flow drain associated with a single lump payment per month.
If your potential lender requires a daily or weekly payment schedule, it’s important to make sure your business has consistent cash flow throughout the month. This type of payment schedule might not be a good choice for businesses that rely on a month-end influx of cash flow to maintain business operations or on infrequent inward deposits.
OnDeck: We offer weekly, or daily, repayment options for your loan. If you choose daily repayments, your first repayment will be due the following day. If you choose weekly repayments, you first repayment will be due 7 days after receiving the funds.
8. What are the key terms in my loan agreement?
When considering a loan it’s important to understand the various metrics used by the lender. Some lenders will use Annual Percentage Rate (APR) to show the price while others might use Cents on the Dollar (CoD). These metrics can vary considerably and make it very difficult to compare your lending options. At OnDeck we clearly explain all metrics using The SMART Box, an easy to use tool which clearly displays pricing metrics for your loan.
You will discover there is likely more than one option available to you when you’re looking for a small business loan, and some will be a better fit than others. This means you have the ability to look for a loan that will be a good option for your particular business situation.
^MYOB Pulse Survey 2016