Before the Business Loan: Questions That Must Be Asked

So you need financing to get your business to the next level? One of two things has probably happened: you either went to a bank and they denied your loan request, or you know you don't want to waste your time because the banks rarely approve small business financing requests. We all know what happens next... hello internet.

As your search begins, you'll find all kinds of impressive websites that convince you that your funding is just weeks or days (or even minutes) away. Of course you would be wise not to believe everything you read online but ultimately you'll likely end up speaking to some different people who try to sell you different financing packages and who offer to help you with your funding needs. To say that it could get confusing would be an understatement.

You will likely encounter one of two different kinds of people. One is the "sell you my stuff" guy and the other is the business financing professional who seeks to help you find the best financing for you that either meets some or all of your financing needs.

The "sell you my stuff" guy doesn't ask as many questions and likely will spend more time telling you about their awesome funding options. The business financing professional will have a few basic questions.  Here are some basic questions that would be asked by someone who seeks to understand you and your needs before offering you a funding solution for your business.

How much money do you need?

This is a pretty obvious question. This one won't get missed too often; just don't let someone talk you into getting more money than you need. The only time that makes sense is when you're setting up lines of credit. Typically you don't get a loan until you need it but it's wise to set up lines of credit before you need them.

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What do you need the money for?

If you need to finance a big piece of equipment then it's likely that you'll want to get a lease or a loan to finance that equipment. Using a working capital line of credit is rarely a good use of funds for equipment since your lines of credit should normally be for shorter term needs and not for financing long-term debt. When you understand what you need the money for, it allows finance professional to think through lenders who like the kinds of transaction you're entering into. It also helps to know if a loan is best or if a line of credit would be more appropriate.

When do you need the money and can you proceed with a portion of the funding you need?

If you need $250,000 to start your business and it's needed for a variety of purposes then it's likely that you can take that financing in tranches or stages. So getting started with $100,000 will probably be fine for a few months or the first year. However, if you need $250,000 for a large piece of equipment then that's a totally different form of financing and you probably can't get anything done with $100,000.

Tell me about your personal credit

Don't forget this one. If you're in the early stages of getting your business off the ground sometimes this is all you've got. Be sure to treat your credit as an asset and remember that the better your credit is the more funding options you'll have -- and the lower the cost of those options. If you have a business that creates less than $10 million/year in revenues then your personal credit is probably going to matter.

But what about those websites that says that your credit doesn't matter for a small business? Good question. There are definitely a large number of non-bank lenders out there who are willing to lend to people with damaged credit. Just remember that the money won't be cheap. There's a time and place for everything, but you're a small business owner so just remember that when your personal credit isn't good you'll pay for it many times over.

Give me the cliff notes on what you do and how your business is different than the competition

Sometimes I ask this question first and sometimes I ask it last. Entrepreneurs are famous for giving you an earful on this one, so I personally sometimes add the "cliff notes" part to help my clients get to the point. Naturally, the "sell you my stuff" guy is less interested in your business and more interested in "closing a deal."

The reason this question is so important is both to get the proper funding but also for communication with the lender. Finance professionals often work with a variety of lenders and act as a liaison between borrower and lender. It is important that they understand the borrower, their business and their needs so they can properly answer the questions from the lender.

So as you're seeking the funding you need, be sure to pay attention to the guys and gals on the other end of the phone or email conversation. Are they asking questions to understand and assist, or did you get one of those "sell you my stuff" guys? It's confusing enough trying to get financing so plan on making the effort to find someone who will help you navigate the confusing terrain that's out there, and who has your best interest in mind and at heart.

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