Considering a Small Business Loan? Here Are the Questions to Ask Before You Borrow

August 18, 2022

With strong wages and job growth shoring up some of the economy’s dips and rises over the past few years, many small business owners and entrepreneurs nationwide are starting to catch their breath. But as a business owner, you may also be preparing for higher interest rates and the end of some federal loan programs that helped small businesses succeed through recent uncertainty and fostered the nation’s economic well-being. 

As these trends show, owning a business means staying agile and ready to respond to changes in the economic environment. In these variable times, many business owners wonder how they can best position themselves to capitalize on the economy’s positive momentum — while preparing for any unforeseen bumps in the road ahead. Your banker can help you assess your opportunities.

You might also be wondering: Is this the right time to borrow? When it comes to growing your business, financing can make all the difference. You may be ready to purchase new equipment, have unexpected expenses you need to meet or simply want to increase your cash flow. Whatever the case, it’s a good idea to have a clear understanding of your needs before you begin to approach lenders. 

Here are some questions to help you decide whether applying for a business loan is a good option for you right now.    

Am I ready to provide all the information lenders need? 
To understand your goals, the bank will evaluate your business and its needs. Lenders will want to see various kinds of documentation before they consider you for a loan. Relevant information may include your business plan, any relevant licenses in your city or region, tax and payroll documents, personal and business bank statements and profit-and-loss statements. Consider making a checklist, or ask your banker to provide you with one. This can make it simpler to assemble everything you need beforehand. 

What type of loan is best for my business?
Are you facing unexpected costs? A revolving line of credit might suit your situation best. Want to purchase new equipment? There are equipment term loans that could provide a good solution for your business. Is it time to expand to a new location or add real estate to your asset portfolio? You may want to consider a commercial real estate loan. Your lender may be able to assist you with Small Business Administration (SBA) loans, too, including 504 loans, 7(a) loans or microloans. These solutions can finance startup costs, capital expenses or business purchases.

How will I use the money? And how will I pay it back? 
It might seem simple, but you might be surprised how many would-be borrowers don’t think to ask themselves these two important questions. It’s a good idea to formulate a clear and detailed answer before you apply for a loan. Are you seeking a loan to drive revenue growth? You may want to estimate how much. Do you want to use financing to reach new customers? It might be a good idea to set a clear goal for how many. Demonstrating that you have a plan to use your loan wisely and repay it on time can help lenders mitigate risk, making you a more appealing borrower.

What kinds of terms work best for my situation? 
It’s wise to consider your long-term plan as well as your short-term needs and then figure out where financing fits into that overall picture. One simple rule of thumb: Short-term money is for short-term purposes, and long-term money is for long-term purposes. Short-term money (loans that come due within a few months to a year) could include a bridge loan to cover operational expenses or meet immediate obligations. Long-term money — which will mature at one year or more — could be a good option for a purchase of fixed assets or equipment, investment in R&D or expansion. Understanding appropriate use of credit can be a useful way to evaluate such variables as the length of the loan and repayment terms. 

Whatever your goals for your business, a loan could be one way to make them a reality. To learn more about how we can help, contact your Western Alliance Bank relationship manager.