Small Business Lending: 7 Things You Should Always Ask a Prospective Lender
As a small business owner, you might cringe at the thought of taking on debt.
We don’t blame you! We’ve all heard stories, both at the consumer and business levels, about the perils of unsustainable debt habits.
But the truth is, small business debt can be both foe and friend.
When used responsibly, a small business loan can help you launch a new product, kick off a geographical expansion, or even survive a one-off crisis. Rather than something to be feared, small business debt can be an emergency flotation device or even an engine of growth.
A pivotal part of getting small business debt right, though, is ensuring you find a dependable lender that has your best interests in mind. Indeed, by smartly screening and selecting a lender, you’re likelier to end up with both a reasonable loan that achieves your goals … and a financial ally that can continue assisting your budding firm for years.
Today, we’re going to help you by sharing some questions to ask when interviewing prospective lenders. These questions will help you choose a lender, home in on an appropriate loan, and also teach you more about the process in general — useful knowledge to have if you need another business loan in the future.
7 Questions to Ask a Prospective Small Business Lenders
1. What do I need to have to apply for a small business loan?
While some lenders’ requirements are standard, others are not — paperwork and eligibility factors will probably differ somewhat from one lender to the next. Some things you might need/have to show include (but certainly are not limited to) personal and/or business credit scores, business plan, business loan proposal, financial documentation and tax returns.
2. What type of small business debt is best for me?
It’s entirely possible you’ll walk into a bank thinking you need a small business loan, when in reality, what you need is, say, a small business line of credit or even just a business credit card.
Banks and other lenders often provide numerous products, some of which are built to serve extremely specific needs. For instance, healthcare lending is necessarily different than traditional lending because of the industry’s particular rules and regulations.
So don’t march into the bank asking for a loan. Instead, discuss your financial situation and ask about what debt product might best be able to address it.
3. Are you an SBA Preferred Lender?
U.S. Small Business Administration (SBA) loans are guaranteed by the government agency to get new small businesses off the ground, or push existing small businesses further by continuing the growth cycle. That “guarantee” part is important. The SBA doesn’t actually issue the loans — they come from different types of lenders.
SBA Preferred Lenders are specially designated institutions that are authorized to act on their own. In other words, rather than having to communicate with the SBA about an application, the lender can make the decision itself, which speeds along the approval process.
4. What kinds of rates, closing, and other fees do you charge?
Rates and other fees likely will be determined based on the specific debt product, how much debt you’re taking on, and your creditworthiness. The problem is, it’s difficult to get exact numbers until you’re in the midst of actually taking out a loan or other debt. Your best bet is to come in knowing your credit score beforehand. Once you determine the best debt product(s) for you, ask about typical rates and fees for that product(s) for someone in your general credit range.
Also make sure you ask about all potential fees so you have a clear understanding of the true cost of taking out a business loan. This will prevent any unpleasant surprises at closing, and it will also help you better comparison-shop among other lenders.
5. Do I need a personal guarantee?
A personal guarantee is a part of your loan contract that makes you personally responsible for repaying the loan – including in the event that your business defaults. Guarantees can be limited (you’re only responsible for a certain portion of the loan) or unlimited (you’re personally responsible for paying back the entire loan).
In some cases, a bank will allow you to put up collateral rather than providing a personal guarantee. Frequently, if you’re using a loan to purchase an asset (say, a forklift), the asset itself will be used as collateral
6. How long will it take for the loan to be approved?
This question will be particularly important if you have an urgent need. But in general, you should determine the length of time between your initial application and bank approval/funding.
Approval timing won’t just differ from bank to bank, but from product to product, too. For instance, a small business credit card application could be accepted in minutes, but a traditional business loan could take up to a month.
Note: One thing that will almost always speed up an approval is having all the necessary paperwork and other documentation accurately filled out and promptly delivered.
7. What can I use the funds for?
You’ll likely be approaching a lender because there’s something specific you need money for — not just general-use cash. As long as the lender knows that, they should be able to steer you to a product that allows you to use the funds for the specific thing you need.
But SBA loans do (and traditional loans can) have varying restrictions on how funds are used. So you’ll want to explicitly ask whether the debt product you’re getting allows you to use the funds the way you want to use them. And you’ll also want to be aware of any restrictions just so you can ensure your business toes the line.
Looking for a Lender? We Can Help
Financial relationships are critical to get right. Working with a poor lender can result in a small business loan with onerous rates, uncertain terms, and headaches throughout the process. Working with a skilled lender can save you money, give you certainty, and evolve into a meaningful financial partnership that will benefit you for years on end.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that services small and midsize businesses. Through our consulting services, we can help you determine an appropriate banking partner that can handle a single loan, or become your primary destination for all of your financial needs.
Want to know more about how we can help? Call McManamon at 440.892.8900 or contact us online today.
Tags: small business, small business bank account, small business banking, small business finances, small business financing | Posted in McManamon & Co., small business, small business banking, Small business finances