There is nothing wrong with needing to borrow money. In fact, it is almost a guarantee that startups and small businesses will need to take out a loan at least once in their lifetime. What most business owners often fail to recognize is that securing a loan is much more involved than simply filling out the appropriate paperwork and waiting, with bated breath, for their request to be approved or denied. Before you even start the application process, there are 5 important questions you must first ask yourself to see if you are even prepared to request a loan:
1. Am I even qualified for a loan?
Have you ever heard the phrase “It doesn’t hurt to try?” In this case, it does. Applying for a loan is similar to applying for a credit card. If you get denied, no matter the reason, it will cast a shadow on your name, making it harder to borrow in the future. Research the requirements of the lender you plan to approach and see if you meet their specifications. At the least, you maybe able to uncover the minimum credit score they require and what you will need to prove upon applying, like your business’ cash flow.
2. Am I asking for the right amount?
Don’t just ask for an arbitrary amount of cash in hopes that it will be enough to cover the expenses you need it to cover. When you create a cash-flow projection, you will be able to determine the amount of money you will actually need. If you go in without one, you may be asked to create one; if you find that you have underestimated the cash you need, it’s going to highlight your unpreparedness.
3. Will I be able to repay the loan?
You are borrowing a substantial amount of money, so of course you are going to have to prove that you will be able to comfortably repay the loan amount. If you provide your financial information and it appears that you have very little wiggle room for any future challenges, it could be interpreted that you are a very high risk client.
4. How exactly will this money benefit my business?
The money you receive from a loan should be treated as an opportunity to create extra revenue. It may be tempting to use it for a temporary fix to catch up on your expenses, but that is not a great use of funds, especially because you will probably find yourself in the same financial situation not too far down the road.
5. Is all the documentation in order?
One of the reasons why some loans never end up being finalized is because the person wasn’t prepared with the right documents. Being underprepared is only to affect you. Not only can it make you look unprofessional, but it can also waste precious time in growing your business. Once you can successfully answer these questions, you can start looking into the various business loan options that would be beneficial for your company!