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3 questions to ask yourself before applying for a business loan

If the Great Recession taught us anything, it’s that businesses need credit to survive. Without credit, businesses must use their own cash, hold large cash positions and create their own safety net for payroll, product purchasing, etc. If you’re a small businessperson applying for a business loan, here are some things to think about first.

Does my business have credit?

Perhaps the most important, and arguably the most overlooked element of applying for a business loan, is that your business must have good credit. Although some banks will give small loans (credit cards) to businesses without a credit history, businesses need to show a history of debt repayment to qualify for more substantial loans.

Another alternative is, as the business owner, co-sign for the loan. As a co-signer, you are promising to repay the loan in the event that the business shuts down or can no longer afford to pay.

Does my business need this loan?

Consider what you need the money for before applying for a business loan. If you are looking for a bit of cash because you are short this month, but are expecting a large payment soon, a low-limit credit card might be sufficient. If you are looking for a larger sum and aren’t afraid to co-sign as a personal guarantor, a business line of credit or fixed loan could be the right option.

The other thing to consider is whether this money is needed to fuel business operations. As with your personal life, there’s no sense in taking out a loan to purchase something you don’t need. Wanting an espresso machine or new company vehicle are legitimate business expenses, but they are in no way necessities and might be unwise purchases to make using credit.

Can my business afford this loan?

Affordability is a big factor in whether or not you should get a business loan. If you’re applying for a loan and are unsure about whether or not you can “make it work,” consult an account manager for an idea of interest rates on loans. Then, plug the numbers into a loan calculator to estimate your monthly payments.

Needless to say, if you discover you can’t afford your loan, it might be time to consider alternatives. Can you cut costs or increase revenue? Do you have any assets you can sell? If so, implement these changes before applying for a loan. If you still find yourself in the position of needing a loan and are still unable to afford it, you might need to reconsider whether your business can survive in the long-term.

Like with any form of credit, you must manage your debt responsibly. Responsible credit use for a business means only borrowing amounts the business can afford to repay on time and in full. When applying for a business loan, business owners who show that their business has a history of being responsible with credit will get loans with the best rates and terms. The preceding three questions are great things to ask yourself to determine whether or not your business is ready for the responsibility of taking on a business loan.