3 Questions to Ask Before Applying for a Small Business Loan
How being prepared can improve your chances of getting approved for the right small business loan
Thinking about applying for a business loan? You’re in the right place. But first, you’ll need to do some homework.
Before diving into the different kinds of small business loans out there, let’s go over the basics. You know you need money, and you know one of the most common ways to get lots of it is by applying for a small business loan.
But “loan” is a broad term. It simply means something borrowed. You loan someone a car; a library loans you books; a bank loans you money. But past that, it gets complicated. There are countless banking terms and loan categories, many of which can be simplified by asking yourself three simple questions:
What am I planning to do with the money?
When do I need the money?
How much money do I need?
Once you’ve determined the answers to these questions, your relationship manager, or loan officer, will be able to easily narrow down which loans are best for your small business. You’ll also be able to make educated guesses that will allow you to compare financing options and feel confident with your decision.
What are you planning to do with the money?
Few business loans are as flexible as a blank check. And for good reason. Do you know what bankers call people with a plan? Successful. Know what they call people without a plan? High risk.
“Loan purpose” is a common term in banking and often one of the first things your lender will ask about. So before you come knocking, be sure you’ve given some thought to your decision to take out a small business loan. Will all of the money be used to pay business expenses? Is this loan going to prove a good investment? Next, evaluate your specific business needs.
Are you a retail start-up looking to purchase clothes in bulk for resale? Ask about Inventory Loans. Maybe you’re a fast-growing industrial business interested in upgrading your welders. See Equipment Loans. Perhaps you’re already well established and just looking to expand your space. You may want to consider a Commercial Real Estate Loan.
The purpose of the loan will not only help you narrow down what kind of small business loan you need. It can also inform collateral options for that loan. For instance, businesses often use the equipment they’re buying as collateral for that loan. That way, they can usually get the funds at a lower interest rate then they would with an unsecured loan. Commercial Real Estate (CRE) is another good example of using the loan’s purpose as collateral.
That said, if you know you’ll be needing steady cash flow to pay a range of expenses, you may want to think about opening a Line of Credit, selling your accounts receivable (ARs) for instant cash through Purchase Order Financing (Factoring), or simply asking about general-purpose business loans. If you’re a new startup or can prove your loan will create more jobs in the community, you may be eligible for a government-backed SBA Loan. These are often used for expansion, equipment, or as working capital.
Business Financing Types and Purposes
Most Common Business Loans
|Line of Credit||Flexible cash to use for business expenses.|
|Equipment Loan||For lending or purchasing new or used equipment. E.g., hardware, software, computers, vehicles, machinery|
|Inventory Loan||For purchasing large quantities of inventory, often at a discounted price. E.g., manufacturing materials, appliances, accessories, office supplies|
Business Real Estate
|Commercial Real Estate Loan||For purchasing, renovating, or doing construction on property for your own business. E.g., owner-occupied or non-owner occupied.|
|Investment Real Estate Loan||For purchasing, renovating, or doing construction on property for investment purposes. E.g., non-owner occupied.|
|7(a) Guarantee Loan||For starting up or expanding a newer business. E.g., purchasing land, building, construction, equipment, working capital, business purchases|
|504 Fixed Asset Loan||For upgrading or expanding fixed assets. E.g., purchasing land, building, renovations, equipment, furniture, soft costs|
|Asset-Based Lending||Flexible cash to use for business expenses.|
|Purchase Order Financing||Flexible cash to use for business expenses.|
When do you need the money?
Now that you’ve determined what you need the money for, you should have a pretty good idea of your timeframe. For instance, an attractive new property available at a surprisingly low square-footage price may require immediate cash, whereas new office desktops will not be in such short supply.
At most banks, your answer to “when do you need the money?” will limit the loan options available to you. Lucky for you, Texas Citizens Bank has a good track record of closing deals on tight deadlines. Known for our fast transaction time, we’ll work with you find a sensible loan, tailor the terms, and get it to you when you need it.
In addition to our flexible traditional loans, we also offer attractive alternatives for those who can’t afford to wait, like Accounts Receivable Purchase Solution, which provides ready-to-use cash within 48 hours.
When it comes to usage rates on that cash, most purpose-specific loans are installment loans, which provide “close-end credit.” This means borrowers have a pre-defined payment schedule that requires them to make regular payments, usually monthly. Use our handy Loan Payment Calculator to help determine which loan terms work best for your business, budget, and timeframe.
How much money do you need?
Responding to a banker’s inquiry about desired loan amount with, “how much can I get?” is a good way to make a loan officer suspicious right off the bat. Now it looks like you’re loan shopping.
Instead of thinking about your small business loan as money lending, think of it as an investment. Banks aren’t interested in giving out free money; they’re interested in investing in high-character people with high-potential business ideas. They want to see that the money you borrow will help your small business make even more. That way, you can make good on your promise to pay it back.
Coming in with a total broken down by expected expenses proves that you’ve thought the loan through. This approach will not only make a good impression, it will also speed up the process. In addition to not having to think through your plan for the money on the spot, your banker is less likely to ask as many follow-up screening questions as no red flags have been raised.
How do banks decide if you’re worth the investment? They look at both your personal and business-related financial history. Do you have a good track record of paying back the money you borrow? Is your credit healthy? Do the numbers check out? With each yes, you improve your chances of getting the loan you want on your terms.
Above all, be prepared. Asking just to ask is risky. It’s risky for a bank to loan money to someone who doesn’t have a solid plan for getting it back, and it’s risky for you as you’re less likely to get what you need and multiple requests can hurt your credit score. Establishing good credit is the foundation. But don’t assume that’s your all-access fast-pass to loan approval.
Banks need to see that you are constantly looking forward. For this reason, it’s important to come prepared with thoughtful answers to “Why?” “When?” and “How much?” As a result, you will check the additional boxes needed to master the art of the small business loan application.