8 Questions You Need to Answer Before Taking Out a Loan for Your Startup

January 6, 2016

2:00 pm

The moment you realize you need to borrow money for your tech startup may not be the moment your business is ready to borrow. Before you approach any lender for a business loan, you need to ask yourself these 8 questions about your business and its needs to make sure you have a clear plan of action and ensure a smooth process.

Who will you borrow from? Where will you get the money?

Lending options basically include:

You’ll need to do some research on each type to find out which best suits your needs. There are many resources online that allow you to compare and contrast lenders, which can simplify your search and help you get the clarity you need before approaching a lender.

What do you need the money for?

Be prepared to answer this for yourself, and especially for the lender. Don’t just list reasons you need the money. Think about (and write down) your detailed 30-,60-, and 90-day plan of action for spending the money and using it to grow your business. Get detailed! It will only help your chances of receiving the loan.

When do you need the money?

Is this an immediate need, or something you’re planning long term that can be put on hold until you receive the funds? Make sure you know when you’ll need the money and communicate this clearly with your lender. When it comes to borrowing money, surprises are never a good thing.

When can you pay it back?

When can you pay the lender what you owe–and can you pay it back at all? What will your monthly payments be, and for how long? Keep the interest in mind when you consider this question, and be honest with yourself. You don’t want to take out a loan that you will end up defaulting on!

How much money do you need?

Based on the detailed plan you should have come up with for your business to use the money it borrows, how much money will you need? Don’t ask for more than you need. It lessens your chance of being approved, and it increases the burden of repayment once that time comes. Be conservative but realistic in your calculations and estimations. Highlight the uses of your product and talk about the way it will innovate the industry.

How long have you been in business?

This question could also be phrased as, “How sure are we that your business will last?” Has your business been around for 6 weeks? 6 months? 6 days? Your answer will be important in a lender’s decision to loan your business money, but being a new business doesn’t necessarily dash your chances. If you bring the right idea and a competitive edge, you’ll get the money you ask for.

What is the current financial shape of your business?

Once again, being honest with yourself is crucial here. The question is not “Will your business eventually be successful?” How are you doing financially right now? Is your financial situation relatively stable or completely chaotic? This is not a time to list your projections alone. Talk about what you’re currently dealing with.

What can you put up as collateral for the loan?

Do you have assets that are worth enough money to act as collateral should you default on your loan? You’ll need to consider how you’ll manage to put up collateral for your business loan, even though it’s an unpleasant thought. This exercise can help drive home the seriousness of the situation for many entrepreneurs. What are you willing to gamble your new business on?

Once you’ve asked yourself these questions, you’ll have a better idea of what type of loan you’re best suited for. Doing plenty of preparation beforehand will ensure you’re not caught off guard when you speak to a lender about borrowing money to grow your startup.

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Debra Carpenter contributes to the Huffington Post, Startup Grind, Business2Community, and other publications. She is a freelance content specialist who enjoys writing about startups, women in business, and the freelance industry.

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