Considering a Small Business Loan? Here Are the Questions to Ask Before You Borrow
Small business is the lifeblood of the California economy, with 7.2 million workers — or nearly half of all private-sector employees in the state — employed at one of California’s 4.1 million privately held firms.
When the economy experiences turbulent times, small businesses may be more vulnerable. If you’re one of California’s many entrepreneurs, you may wonder how to ride out any rough waves that come your way. Your banker can help you chart your course.
Even in boom times, financing can make all the difference for companies. The bottom line? At some point in the life of your business, you may wish to consider applying for a loan. Perhaps you have unexpected expenses, need cash flow or want to purchase new equipment. When considering a loan, it’s helpful to understand your needs clearly before approaching lenders.
Here are some questions that might help you decide whether applying for a business loan is a good option for you right now.
How will I use the money? And how will I pay it back?
You might be surprised how many would-be borrowers don’t ask themselves these two crucial questions. Before you seek financing, it’s a good idea to not only ask them but to formulate a clear and detailed answer. Will the money drive growth in revenue? You may want to estimate how much. Help you reach new customers? It’s useful to try to set a goal for how many. Lenders know that careful planning mitigates risk. Showing that you have a plan to use your loan wisely and repay it on time helps them do just that.
What type of loan is best for my business?
When you research your loan options, you may turn up some you didn’t know you had. Want to cover startup costs? Small Business Association (SBA) lending programs like SBA 504 or 7(a) could be the way to fund your business. Or, if you’re facing unexpected expenses, a revolving line of credit might suit your situation best. Need to make an equipment purchase? Equipment term loans could be a good option. Seeking to expand to a new location or add real estate to your asset portfolio? A commercial real estate loan might fit the bill.
Am I ready to provide all the information lenders need?
In considering you for a loan, the bank will want to see various kinds of documentation. This may include your business plan, any relevant licenses in your city, tax and payroll documents, personal and business bank statements and profit-and-loss statements. Consider making a checklist beforehand (or asking your banker for one) so you can assemble everything you need.
What kinds of terms work best for my situation?
Before approaching lenders, it can be helpful to think through variables such as the length of the loan and repayment terms. Banks like to see that borrowers have a sense of the appropriate use of credit. One rule of thumb to keep in mind: Use short-term money for short-term purposes and long-term money for long-term purposes. It’s a good idea to evaluate your long-term plan as well as your short-term needs and then figure out where financing fits into that overall picture.
Whatever your goals for your SoCal business, a loan may be the right option to help make them a reality. To learn more about how we can help, contact your Torrey Pines Bank relationship manager.