The Source

by FORA FINANCIAL

Working Capital

Should I Get a Small Business Loan? 8 Questions to Ask Before Applying

Do you need a loan? You're not alone. In their quest to grow, small businesses borrow more than $100 billion per year. And you can be among them — if you make a clear case in your application.

Lenders look at many criteria during the loan application process. So if you know what they are and how each impacts your chances of approval, you'll have a better shot from the start. Ask these business loan questions before you fill out one line of the application:

1. How's your credit?

Your firm's credit score is an essential qualification for a small business loan, especially if you'd like to borrow money from a traditional lender. Depending on your business structure, business lenders may consider your personal credit score, business credit score, or both. These scores will give the lender a good idea of how likely you are to repay the loan and may often affect your interest rate. Before you apply, check your credit report at Dun & Bradstreet or at one of the other credit reporting agencies. If it isn't in tip-top shape, take steps to clean it up before you apply.

2. How long have you been in business?

Most lenders have a time-in-business requirement that disqualifies new business owners from financing. You typically need a two-year track record, but that isn't set in stone. If you're newer, you can try to make a convincing case through the other criteria listed here. You may also have better luck seeking financing from an alternative lender.

3. Do you have a new or updated business plan?

Any lender will naturally want to see your strategy for future growth. If you already have one, update it. If you don't have a business plan, it's important to write one yourself or get some expert assistance. A typical business plan includes:

  • A short and crystal clear mission statement

  • Management team profiles

  • A marketing strategy, including an analysis of your target markets and customers

  • Your cash flow projections

  • Your projected revenue and expenses for the next few years.

4. How is your business structured?

Loan providers will want to know how your business is structured. That's because they'll evaluate sole proprietorships, LLCs, partnerships, and corporations differently. One example: LLCs and corporations provide lenders with more protection against financial or legal issues, so they are more likely to lend to those types of businesses.

5. Are you in a niche or controversial industry?

While some lenders lend to small businesses in all types of industries, others cater to specific industries — and may exclude others from consideration. Some lenders, for example. won't work with businesses in the adult entertainment and/or gaming categories.

6 Where are you located?

Geographic location isn't usually a major factor in business loan approvals. However if your location comes with some inherent risk (such as a waterside restaurant in a FEMA-flagged flood zone), a lender may be more hesitant to approve you. Before you apply for a business loan, ask about geographical limitations.

7. Do you have collateral?

Secured loans require collateral — assets that you pledge in the event you default on the loan. Collateral may include:

  • Real estate

  • Equipment

  • Vehicles

  • Inventory

  • Accounts and deposits

If you don't feel comfortable risking business collateral, you can opt for an unsecured loan. In this case, the lender may ask you to sign a personal guarantee — a document that confirms you'll provide your personal assets as collateral.

8. Have you mastered the paperwork shuffle?

But wait, there's more. Make sure you're ready to provide a lender with any other required documents, including your firm's:

  • Employer identification number (EIN)

  • Business licenses and permits

  • Bank statements

  • Balance sheets

  • Tax returns

Consider more than one path to success.

Don't be discouraged if you can't make it through this entire checklist successfully. If you realize that you won't qualify for a loan from a traditional lender, you may qualify for an SBA loan by proving you haven't been able to secure funding. And in the meantime, weigh all of your funding options with our guide to small business loans.

Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.

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