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10 Questions to Ask Yourself Before Taking Out a Small Business Loan

Before Applying Business Loan | Moula Good Business

Whether it's for a big expansion or just some extra cash to keep things moving, odds are a small business is going to need a loan at some point in its life.

However, applying for a business loan involves a lot more than just filling out some paperwork. There are a lot of things to consider before taking out even a small business loan, so it’s important to do your research. Try asking yourself these ten questions before applying for your business loan:

1. Will My Business Qualify?

The last thing you want is a Credit Kamikaze! Applying for a loan you’re not going to get is only going to hurt your credit score and your chance at securing funds in the future. Check a lender’s lending requirements before you apply for anything. Most lenders will have this information on their website, or you can just call up and ask! Requirements will differ a bit from lender to lender. The most common requirements will be things like positive cash flow projections, assets for collateral, business plans, good credit history etc. Moula uses online business data to assess loan applications, so we don’t need any of that stuff!

2. How Much Do I Really Need?

This is where you need to be brutally honest. Just because a lender says your business is eligible to borrow up to a certain amount, doesn’t mean you actually need that much. You don’t want to borrow too much that you struggle with the repayments but you also don’t want to borrow too little that you won’t get the benefit of the loan. That sounds a bit obvious I know, but it’s an important thing to consider. Do some cash flow projections to figure out how much you can afford in repayments and some estimates on how much you’ll need in total.

Learn more about business cash flow management.

3. Do I Need Collateral? (And How Much Can I Borrow Against It?)

This one’s only for secure loans. (Take a look at our Secured v. Unsecured Loan comparison if you’re still debating that one). Take a look at your available assets and try to calculate their value. Low-ball it here; odds are the banks won’t value it as high as you would. In most cases, a bank will value your asset at 60-70% of what you think it’s worth (sucks right?). Moula and other non-bank lenders typically won’t ask for collateral, so if you are going down that route you won’t have to worry about this one.

4. Do I Have The Cash Flow To Repay The Loan?

Carrying on from point two, figure out exactly how much you need and how much you can afford. You only do yourself a disservice when you apply for $200,000 but only take in $50,000 annually. At Moula we analyse your business’ online accounting data when you apply for a loan, so we won’t actually lend you more than you can manage. Other lenders, particularly the banks, will sometimes require you to show good financial projects. Even if they don’t, it can be a good exercise to calculate your repayments and make up some projections for yourself. It’s always good to have a roadmap, and you want a bit of wiggle room with your repayments too.

5. Will The Money Help My Business Grow?

Pretty simple; what is the loan for and how does it factor into my business plan? Taking out a loan for operational costs and to help cash flow is fine, but make sure you’re measuring the return on your investment. You don’t want to find yourself in the same boat six months down the track, taking out another loan. It’s all about growing your business, so you want to generate as much revenue from the loan as you can. Whether that’s investing in marketing or renovating or whatever is up to you!

6. What Is My Business' Credit Rating?

Similar to the first point, many lenders will require a credit check. If a lender does have a minimum credit score, you can get your business’ credit report from credit reporting bureaus rather than applying directly with the lender. It’s also a good idea to go through your credit report yourself. Sometimes things will be reported incorrectly or not reported at all. These mistakes can hurt your credit score so it’s a good idea to make sure everything’s in order. Once you’ve got your credit report you can also take measures to boost your credit score before applying.

7. Are My Personal Finances In Order?

Until your business reaches a substantial size (around $5 million to $10 million annual revenue) banks are usually going to want to look at your personal financial statements. These include everything from outstanding student loans and credit card debt to mortgage repayments. Because of this, its good to know both your personal and business credit scores. Requiring credit scores is one of the main differences between Bank and Non-Bank lenders, so if you go with an alternative lender you won’t have to worry about it as much.

8. Do I Have All The Necessary Documentation?

A lot of small business loans never close, not because the business didn’t qualify, but because they couldn’t produce the necessary documentation. If you can’t produce the paper trail, or if you take too long to get it together, it can draw out the loan and raise your risk of rejection. Banks are notorious for requiring a lot of documentation and this often results in a longer application process. However, most lenders will require the same kind of stuff – business plans, bank statement and the like – so it’s a good idea to get on the front foot.

Additionally, some lenders will require your business’ tax returns so it’s a good idea to know where and how to access your ATO information. Keeping your tax information up to date is more important than ever as failing to lodge tax returns and outstanding tax arrears can hurt your business’ credit rating.

9. Are There Any Additional Fees?

This is a sneaky one! Make sure there are no hidden fees associated with your loans such as establishment, ongoing monthly and early or late repayment fees. (Take a look at how to spot Hidden Fees in your loan). An early repayment fee is the big one! In some cases, lenders will say they won’t charge early repayment fees, but you will still have to pay the aggregate interest if you pay early. So you’re not getting as much benefit for paying early as you think! Make sure to ask all these questions when applying for a loan. You can always contact our support staff if you have any questions.

10. What Type of Loan Do I Need?

Depending on whether you go to a Bank or Non-Bank lender, there can be a lot of different loan options. The standard term loan usually works for most businesses’ needs, however, it’s good to weigh up your options. In general, banks usually have more options when it comes to funding and can often lend more. That being said, non-bank lenders are a lot quicker and often have an easier loan process. It comes down to each business’s personal funding needs – do you need a lump sum of funding? A continuous line of credit? A small loan now with another small loan again in the near future? There are a plethora of loan options to consider. If you have a unique situation, feel free to contact our customer service team to see if we can work out a specialised loan plan for your business!


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