Small Business Loan Criteria: Questions to Ask Lenders

Applying for a business loan has many criteria and important questions to ask yourself and your lenders. Asking the right questions will save you time and potentially make the difference in actually securing a small business loan.


Ask Questions Before Applying for a Business Loan

Before you apply for a business loan, there are certain questions you should ask yourself and the lender. Asking these questions will better prepare you for getting a business loan. These questions will also give you insight into the lender’s loan approval process.

Questions to Ask Yourself

Taking on a business loan can help you or hurt you. This is why it is important to ask yourself some questions before taking out a business loan. Decide if you need the loan and how much loan you can afford.

Here are some practical questions to ask yourself:

Questions to Ask Lenders

Every lender is different. This is why it is important to ask lenders some questions before taking out a business loan. Decide if the lender has your best interest at heart or whether they’re a predatory lender. Stay educated so you can stay protected.

Here are some practical questions to ask your lender:

Why Ask Yourself These Questions When Applying for a Business Loan

There are some questions you need to ask yourself before applying for a business loan. It's important to ask these questions because answering them will give you a pretty good indication as to whether or not you need the loan and how likely you are to get approved for a business loan.

Here are some questions and the psychology behind asking them:

What do I need the loan for?

It's important to ask yourself why you need the money.

How important the reason for getting a business loan will determine whether you should apply for the loan or not. Sometimes we think we need something when there might be a better solution found somewhere else.

Remember that you have options and that you need to explore these options before becoming fixated on this idea of getting a business loan.

How much money do I need to borrow?

When applying for a business loan, it's a good idea to know exactly how much money you need to borrow so that you can cover whatever costs you're trying to cover.

The reason you need the loan will determine the cost of the loan and how much to borrow.

What does my business credit profile look like?

Before you apply for a loan, it's a good idea to pull your business credit reports. This is as simple as pulling your Dun & Bradstreet business credit report, Experian Business credit report, or your Equifax Small Business credit report.

These are the three main business credit bureaus. Your business credit bureau reports will give you a good indication as to whether or not you'll be approved for the loan. There is no sense in applying for a business loan if you have terrible credit or very little business credit. In such a case, you may decide on another solution.

How quickly do I need the money?

If you find yourself in an emergency where you need money fast, understand you may find yourself paying a lot in interest.

A high-interest business loan could later on negatively affect your business. Depending on the type of loan you're applying for, getting a business loan can happen in as little as a day or can take several months.

If you're applying for a Small Business Administration (SBA) loan, like the SBA 7(a) loan, it can take you a long time to get approved. If you get approved for a business loan overnight, there's usually high interest and predatory lending practices behind the scenes. Take one of these quick loans, and you may find yourself in a worse situation than you were in before applying for the business loan.

Why Ask Your Lender These Questions When Applying for a Business Loan

It's important to ask the lender some upfront questions. Ask these questions to determine if you qualify for a business loan and to assess how likely you are to be approved.

Here are some questions to ask your lender and the psychology behind the questions:

Do you lend to businesses in my industry?

The reason you want to ask this question is that many lenders stay away from certain industries because of the heavy risks associated with those industries.

For example, take the restaurant industry — most small restaurants go out of business in the first five years. For this reason, lenders are hesitant to loan money to these startups. Other industries are also considered high risk. The SBA does not guarantee loans in the real estate and insurance industries. So if you operate in these industries, it would be a waste of time to apply for an SBA loan.

What is the interest rate and total cost of the business loan?

Find out what interest rate the lender charges.

If it's an extremely high-interest rate, chances are you're dealing with a predatory lending agency. You may pay several times over the amount of money you borrowed throughout the lifetime of the loan.

Avoid these types of loans as they can sink your business fast. It's a good idea to know the typical interest rate for the type of loan you're applying for. You can find this information out by doing a simple Google search or checking around with different business loan underwriters.

You also want to find out the total cost of the loan. What is the total amount of interest to be paid? Also, understand the difference between interest rate and annual percentage rate (APR). Always find out what the APR of the loan is and what will be the payment schedule.

Different lending agencies set different payment schedules. You may be required to pay the loan every week or once a month. Some lenders have you pay just the interest and then require that you pay the principal amount in full at the duration of your loan. This is called a balloon payment. If this is the case, you want to make sure you have a plan in place to have that money ready to pay that balloon payment when it comes due.

When will my first payment be due?

Some lenders may wish you to pay them on the first of every month. Some may require you to pay them 30 days out from the time your loan was originally approved.

You want to make sure you know when the loan is due so you can make sure you get it paid on time. Paying your loan on time will help you build your business credit. Even being one day late, however, can stain your business credit profile. This can hurt your chances of getting future loans.

How do I make payments?

Different lenders have different options for borrowers to make payments.

Merchant credit loans automatically deduct a percentage of your credit card sales each day. Some lenders give businesses the option of paying with a credit card but not all of them. Some lenders may require you to make a payment in person.

Others may prefer you to pay electronically or online. Some lenders may require you to set up an ACH payment plan where the money is automatically taken from your business checking account each month on the day the loan comes due.

What is the length of time before my loan gets approved?

Applying for a business loan generally takes more time than most borrowers realize. There are exceptions to the rule for different loans. Underwriters have different time frames. It's a good idea to ask your business loan underwriter or loan officer some questions, like:

  • How long before the funds are disbursed?
  • How long will it take before I’m approved for the loan?
  • What variables are involved in the approval process?

What’s your BBB rating?

If your lender gives you a vague answer or tells you they don’t know, it should raise a red flag.

There are ways to find out, and we recommend you do. Not all lending institutions are created equal. Some engage in predatory lending practices that can devastate a business and stunt its growth. We advise you not to do business with such lenders.

Can I speak with some of your current and previous customers?

Talking to past and current customers will shed light on the organization and teach you a lot about qualifying for a business loan with that particular lender.

Do you report to the major business credit bureaus?

This is an important question because if the lender does not report to the major business credit bureaus, taking out the loan will not help your business credit score.

Even so, it may still hurt your business credit if you miss a payment and get behind. You want to deal with lenders who report to the major credit bureaus so that you can build your credit history and business credit profile.

Main Takeaway

Applying for a business loan can be a complicated and confusing process. It may take much longer than you originally anticipated.

The loan application process can take several weeks to months before you receive a decision. If you don’t ask the right questions to determine what the loan underwriter is looking for, you may not get approved. In the end, by asking the right questions, you may determine you don’t even need the loan.

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