The bottom line is that asking the right questions can make locking down the right business loan a whole lot easier.
1. How much can I borrow?
The first question any lender, finance company or bank will ask you is how much you want to borrow. It should also be the first question you ask yourself.
The starting point for this calculation is knowing exactly how much money you need to achieve your business goals. Have you got a business strategy written down? Where do you see your business going in the next three, six or twelve months? What will it take to get you there?
Once you know what you need, you’ll need to think about how much you can afford to repay each month. What is your monthly revenue? What are your overhead costs? Do you have any existing loans on the books? The last thing you need is to take out a loan that puts you further away from meeting your business goals, so be sure that you know what you can reasonably borrow without putting yourself in a very stressful position.
The bottom line is that you shouldn’t go loan shopping until you’ve measured your borrowing capacity. How much you want to borrow and how much you can borrow will dictate which lender/s will be interested in funding you. Knowing how much you can borrow will help you make an informed decision about the best lender for your funding needs.
2. When do I need the money?
Some lenders can give you the money in days and some lenders take a couple of weeks to process and fund an approved loan.
However, you might notice that when you get the money in days, the cost of the loan will be greater to you. You are paying for the convenience of having the funding quickly. In rare cases, you might find that two lenders give you the same rate and one can give you the money faster than the other. If this is the case, you’ll need to weigh up whether the loans differ in other ways and be sure you’re getting the loan that best suits your requirements overall.
Once you know when you’re going to need the money, you can organise your business activities so as to get the best value out of the loan.
3. What is the interest rate?
Knowing the interest rate on your loan is vital because it helps you work out the true cost of borrowing (i.e. how much will you really be paying the lender?). This will give you a view of what the loan will cost your business overall.
Once you know what interest rate you’re being offered, you will have a benchmark to seek out the most competitive rate for your loan. This will help you go after the loan that delivers the best value for your business.
Tip: If you’re sold on a loan product but you’ve been offered a lower rate elsewhere, ask the lender if they will match the rate of the competitor. You’d be surprised what a bit of competitive tension does!
4. What is the true cost of my loan?
Interest isn’t the only cost of borrowing money for your business. Other fees and charges to watch out for include:
- Application fees
- Valuation fees
- Legal fees
- Stamp duty
By asking about these charges upfront, you’ll be able to get a clearer picture of exactly how much the loan will cost you and evaluate which loan option suits you best.
5. What information do I need to provide to get my loan?
It is important to know which information you will need to provide to your lender. It will give you time to get your books in order and be able to provide the desired information as soon as possible. This is vital for having your loan reviewed quickly and efficiently.
Different lenders require different documentation, so be sure to ask the question every time you’re considering making an application.
Even if you’ve asked all of these questions, it’s still a great idea to run it past your accountant and/or business adviser as they’ll be able to offer independent advice contextualised for your particular business, and this will help you ensure that the loan you pick is tailored for you.
Jacob leads the Working Capital team at Valiant. He is the go to guru for assisting small business owners with their everyday business finance needs.