10 Questions to Ask Yourself Before Getting a Small Business Loan 2024

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Deciding to finance your company is a big decision for any business owner. Whether you are looking to buy some equipment, expand, increase your working capital, or do something else, there are many small business loan options that can work for you. But it’s important to know what you need and why. Here are some of the important questions to ask yourself before getting a small business loan.

Does My Business Really Need Financing?

Financing is a commitment. Although getting financing in many cases is the better choice than risking not having enough money, it is still important to understand that financing is a big decision. There are certain kinds of small business loans—like term loans—which need to be paid every month regardless of how well your business is (or isn’t doing). There are also other types of financing, like a Merchant Cash Advance, where the amount you pay is dependent on the amount your business makes that month.

Some good reasons to get financing include:

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You have an emergency expense: A small business can experience many different types of emergency expenses. These can range from broken equipment to lack of inventory. Either way, if the expenses (or items you need) are critical to the functioning of your business, it is probably worth considering a small business loan.

You have an opportunity for growth: Growth opportunities do not come every day. So, if your small business has a lucrative opportunity for growth, but you do not have enough cash on-hand to capitalize on it, you should consider a small business loan.

You need more working capital: Small businesses need a certain amount of working capital to operate. This amount should be enough to cover daily expenses as well as to cover emergency expenses if they arrive. If, for example, you need to pay for an unexpected emergency expense and then find you do not have enough working capital to operate, you may want to consider a small business loan.

You want to consolidate debt: Debt consolidation is potentially a very good reason to apply for a small business loan. Because small business owners often end up taking out several loans for several purposes over the years, it can be a good idea to calculate how much you are paying toward each debt as well as how much you are paying in interest. It may make more sense to combine all of your debts into one simple monthly payment through debt consolidation.

How Quickly Do You Need the Money?

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The speed of which you need your small business loan money is another important thing to ask yourself. Let’s say you are planning on using it to capitalize on a fast-moving growth opportunity. Well, if your loan is going to take a week to get approved, then it may not be worth taking out—in that case, you should look into speedier options.

Some types of loans are faster than others. Things like equipment financing and certain online term loans can be very fast, funding your money in as quickly as a day or two. Term loans that come from large, traditional banks, on the other hand, can be slow and take a week or more to get approved and then funded. It all comes down to knowing what to expect.

What Are the Qualifications to Get Approved?

It is important to know what type of qualification you need to get approved for your loan. Different types have different qualifications, and because many applications for them require that the lending institution “pull” your credit report, you want to reduce the number of times you apply for loans that you are clearly not qualified for.

If you are going for a small business loan, you should know what kind of credit the lending institution expects, as well as how long they would like your business to be established, and what its cash flow should be. If you meet all of their criteria, you should be safe to apply. If, however, you fail to meet one or more qualifications, you may want to consider other types.

What Is the Loan Going to be Used For?

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Knowing how you are going to use your loan also applies to whether you should take one out in the first place.

If you need to replace or buy new equipment with it, there is a specific “Equipment Financing” type of small business loan that is perfect for such situations. Equipment loans have higher approvals rates than many other types.

Other than for equipment or some other specific reason, you will also want to determine if you are going to use it for one thing or several. In the case of an equipment small business loan, the downside to some people is that equipment financing can only be used to buy the equipment they specified in their application.

There are other types of small business loans, though, that gives you the flexibility to use the money in whatever way you’d like. You can even use certain term loans for several different expenses. For example, maybe you need to make some repairs to your office, and you also want to put some money toward a new marketing campaign. With flexible financing, you can do that.

What are the Interest Rates?

Interest rates are something you are going to want to think about, especially if you are taking out a long-term small business loan. While a few percentage points may not sound like a lot to you at the time you are applying for the loan, such costs do add up and, you want to make sure that before you commit to taking out a loan that you understand your interest rates and that you are going to be able to pay them.

Can I Pay Back My Loan Early?

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There are a variety of different terms when it comes to paying loans back early. Certain types encourage it, and others penalize it. If you think you may end up paying it back early, you are going to want to discuss it with your financer.

Another option you can look into if you think you are going to pay it back in a matter of weeks or months rather than years is a short-term loan. These generally come with higher interest rates but can be a good option in some cases.

Will the Loan Help My Credit?

Whether the loan you take out helps your credit should be an important part of deciding with the lender to go with and what type of small business loan you need to take out. If you are trying to build your credit, one of the better financing options is a traditional term-loan. If you make all of your monthly payments on-time and pay the loan off, the action will likely improve your credit. Again, though, if you take out a term loan, you want to make sure that you are going to be able to afford the monthly payments—because, if you can’t, missed payments can do damage to your credit score.

For small business owners, having good credit is an essential part of their success. Unless you are independently wealthy and can afford to fully fund your business (or passion-project) on your own, odds are, there will be times when you need help from a small business loan. If your credit is good, the process of getting a small business loan is as easy as applying, waiting a few hours (or days), getting accepted, and then collecting your money.

If your credit is bad, however, you have far fewer options and may have to accept higher interest rates and or shorter payback periods. With that said, many small business owners allow their lack-of or bad credit to scare them away from even trying to get financing through a small business loan. This should not be the case as there are many financing options for a small business owner who has either no credit or bad credit. And if that includes you, make sure that whichever option you choose, it will, in the end, help your credit so that the next time you need financing, things are even easier for you.

In order to build business credit, business owners need to ensure they follow specific business credit strategies to achieve optimal results. Business credit is extremely important for small and large businesses alike, and it should definitely not be overlooked. To get a better understanding of the logistics and formalities associated with business credit, click here

Will You Be Able to Pay Back the Loan?

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As a small business owner, you need to sit down, possibly with your accountant, and review all of your incoming and outgoing money. Come up with a clear budget and a worst-case scenario and use that to determine if you are going to be able to pay back your loan.

Because many small business owners and entrepreneurs are naturally optimistic, some of them make the mistake of overestimating how much their businesses are going to make in the future. As such, some of them take out loans that they cannot afford. This is just the sort of problem you want to avoid as the owner of a company. High levels of debt and burdensome monthly bills are very detrimental to small business owners; they force you to constantly worry about them and make it difficult to think about long-term strategies and solutions. How can you plan for tomorrow when you have to worry about surviving today?

The only way to avoid these kinds of payback-problems is to take a conservative approach will your estimates. If you have sales data from previous years, instead of assuming those sales numbers will go up, calculate what will happen if they drop 5% or more and see if, given that scenario, you would still be able to afford your small business loan. If the answer is no, you may want to consider reducing the amount you are borrowing or, somehow, reducing your spending.

What Type of Small Business Loan or Financing Do I Need?

There are many different types of small business loans, each with their own pros and cons. They include:

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Term Loan: It can be thought of as your most traditional type of loan. With it, you are given a lump sum of money up-front, and they pay a fixed amount of that back every month. Term lengths usually last 12-months or longer. Whatever your fixed monthly payment amount is, with a term loan, you want to make absolutely certain that you can afford to pay it back as you must pay the same amount back to the bank every month—independent of how well or poorly your business is doing. Traditional loans typically require better credit ratings than other types. Visit this site for more information.

Short-Term Loan: It is an alternative financing method that does not require as good of credit as a traditional term one. Short term loans typically need to be paid back in a matter of weeks or months. You can often get short-term financing quickly and easily, and it makes for the perfect way to cover emergency expenses or operating cash requirements. Keep in mind that with short-term loans, you will usually have higher interest rates than with other ones.

Line of Credit: A business line of credit is a great financing option for many small business owners. Unlike other small business loans where you need to make regular payments and “chip away” at the amount you owe, with a business line of credit, you can reuse the amount more than once so long as you make your minimum monthly payment.

Merchant Cash Advance: While not technically a small business loan, a Merchant Cash Advance is a flexible finance method that is dependent on your businesses’ monthly revenue. In other words, if you receive Merchant Cash Advance financing, your monthly payment amounts are dependent on how much revenue your business makes every individual month. This is great in that it grants you more flexibility. An MCA will not, however, improve your credit as it is not technically a form of debt as it is not a loan.

What are the Total Costs?

Finally, before you take out any kind of financing, you want to calculate the total costs. This includes any initiation fees and or any interest or anything else you might need to pay before you have completed paying the small business loan off. Once you have done this, you can finally move forward!


There you have it, ten questions to ask yourself before getting a small business loan. Make sure to consider them all before moving forward with your financing!