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Updated Apr 23, 2024

Before the Business Loan: Questions That Must Be Asked

Getting a business loan isn’t always easy, but you can become a better candidate if you prepare.

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Donna Fuscaldo, Senior Analyst & Expert on Business Operations
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Securing a small business loan isn’t always easy. Banks typically lend money only to established businesses with solid sales and strong credit profiles. The U.S. Small Business Administration (SBA) has money to lend, but funding can take weeks to arrive. That leaves alternative lenders as a viable option for businesses that need money relatively quickly. 

Alternative lenders offer small businesses a variety of loans. They provide fast funding and easy approvals, but even they can put you through the paces. After all, granting loans is about determining risk.

To assess how much risk you may carry as a borrower, lenders will ask you a series of questions. Your answers will determine whether you can get a loan and which one is right for you. 

Questions lenders ask business borrowers

Here are the questions lenders typically ask potential borrowers and the reason behind each one.

How much money do you need?

This might seem like an easy question to answer, but many business owners are unsure of the exact amount. What’s worse, many don’t have a clear idea of how much they can afford to pay back. Borrowing more money than necessary can turn into a dangerous situation. 

Before you approach a lender, figure out how much money you truly need. Make sure your monthly payments won’t hurt your cash flow.  

The amount you want to borrow will also help lenders determine the right loan for you. If you’re covering startup costs of less than $50,000, a microloan may be the best option. If you need a larger amount of money to purchase equipment, equipment financing might make more sense.  

Editor’s note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What do you need the money for?

There are many reasons small business owners need to borrow money. Some seek a short-term loan to cover a cash flow issue or to purchase extra inventory. Others want a long-term loan to bankroll an expansion. Lenders ask this question to match you with the right loan product. Many options exist, with varying terms and interest rates. When you tailor your loan to a specific purpose, it can lower the cost of borrowing and increase your chances of being approved.

For example, say a small business owner needs money for a longer-term project. The SBA’s small business loans provide low interest rates and long repayment terms. The paperwork is more arduous than it would be with other types of lenders, but it’s a better bet than borrowing against your invoices. 

How will you pay it back? 

Lenders want you to pay back the loan plus interest and will go to great lengths to ensure you can. That is why they require you to prove you can afford the loan. That means demonstrating that you have enough assets, cash in the bank and/or collateral to cover the loan, even if your business runs into trouble. When assessing creditworthiness, lenders also consider current and past loans and other business debts.

FYIDid you know
Just because you get approved for a business loan with a low credit score doesn’t mean you should borrow the money. Make sure the cost of borrowing is worth the money.

Do you have enough cash flow to service the loan? 

Being able to afford the loan on paper is one thing, but making the monthly payments might be another. Lenders want to ensure you have enough cash flow to service your loan. Businesses that make a profit have a better shot at getting affordable loans than those that don’t. 

What does your personal credit look like? 

Unless you’ve been in business for years, your company likely does not have its own credit score. Even if it does, that score may not be enough to satisfy lenders. That’s why most lenders inquire about personal credit when underwriting a loan. They want to make sure you don’t have too much debt outstanding and that you have a history of paying your bills on time. Your personal credit score usually dictates if you get approved for small business funding and at what interest rate. 

If you have a record of being in business for years, recurring revenue and a strong credit score, you’ll do best with a bank. If you are just starting out or have questionable credit, there are many nonbank lenders that will be willing to work with you. 

How are you backing the loan?

Depending on the type of loan and the lender, you may be required to offer up collateral. Lenders figure that the more you stand to lose if you default, the more apt you are to repay the loan. Collateral can be paper assets, such as stocks and bonds, or property, such as real estate, vehicles or equipment. If your lender requires collateral, ensure you understand the requirements and inherent risks before you agree to the terms.

Even when lenders don’t require collateral, they often want a personal guarantee. That means they can collect from you personally if the business doesn’t pay back the loan. 

TipBottom line
Don’t get hung up on the collateral if you are in an excellent position to borrow money. The only reason you would lose the collateral is if you were to default. And if you think there’s a chance of that, a small business loan probably isn’t right for you.

What makes your business different? 

Lenders want to know more than your elevator pitch. They want to make sure your business is viable. As a result, they will ask you about your business, what makes it different from its rivals, and how you plan to succeed and grow. This helps both with underwriting and determining the right loan for you. 

Small business loans play an important role in helping the nation’s business owners survive and thrive. While the cheapest loans are reserved for business owners with solid financials and credit profiles, there are many options for everyone else. If you understand what the lender expects from you, you’ll be better equipped to find the right loan type and provider. 

Best business loan providers

Hundreds of lenders offer business loans, so it can be a bit overwhelming. That’s why we’ve evaluated business lenders and chosen the best lenders for business loans. Here are a few to start off your search.

Rapid Finance

Sometimes you need funds quickly because of an unexpected disaster. This is where Rapid Finance shines. The lender provides short-term bridge loans up to $1 million and has a fast approval process, with funds approved and deposited in as little as one day. Rapid Finance also offers flexible repayment terms. Find out more in our Rapid Finance review.

Noble Funding

Noble Funding prides itself on being transparent with customers, providing personalized customer service and having no fees. Term loans up to $500,000 and short-term bridge loans up to $2 million are available to qualified borrowers. Noble Funding also has other types of loans, such as inventory financing, and has approved borrowers with credit scores as low as 525. Discover if this lender is right for you in our Noble Funding review.  

SBG Funding

If you need a larger loan, you may want to consider SBG Funding, which provides business loans up to $5 million. SBG Funding has lower minimum criteria for approval than most other lenders, like a minimum credit score of 500, monthly revenue of at least $10,000, and six months or more in operation. The approval process is fast, usually within 24 hours. Learn more details in our SBG Funding review.

Jennifer Dublino and Tom Gazaway contributed to this article.

author image
Donna Fuscaldo, Senior Analyst & Expert on Business Operations
Donna Fuscaldo, who has 25 years of experience navigating the convergence of business, finance, and technology, is a trusted advisor to small business owners. Her expertise in business borrowing, funding, and investment strategies equips her to provide reliable counsel on everything from business loans to accounting and retirement benefits. Her analysis has graced publications like The Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, Fox Business and AARP, solidifying her authority in the field. Beyond her contributions to the financial landscape, Fuscaldo also lends her wisdom on employment matters, with her expertise sought after by platforms like Glassdoor and others. Armed with a bachelor's degree in communication arts and journalism, Fuscaldo has the unique ability to simplify complex business and career-related topics into actionable insights. This makes her a valuable resource for professionals seeking practical solutions in today's dynamic business environment.
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