A business loan can be an ace in the hole, especially if one is planning on starting a new venture or preparing to scale existing ones. Taking a loan is a big deal.
Do you really need a business loan? What is its purpose? What are the interest rates and repayment terms? Are there any hidden fees I should be wary of? Do I meet the eligibility criteria for a business loan?
Whether one is dreaming of a tech startup, a cozy bookstore-cum-cafe, or scaling their family business, asking the right questions before putting pen to paper can save you from sleepless nights later.
In this blog, we ask the five key questions before you get a business loan, so you know what to ask later.
Why do I need this loan? (Define your loan purpose)
First things first, ask yourself: What’s the point of this loan? Are you trying to get a new business loan to cover startup costs, buy equipment, or simply boost your cash flow? Or maybe you need it for a marketing campaign to grab attention.
When lenders ask about your loan purpose, they’re not being nosy—they need to know where their money is going. A clear purpose not only helps you stay focused but also builds trust with your lender. For example, if you’re looking to get a loan to start a business, explain how the funds will be allocated.
Pro Tip: Write down your goals and break down how the loan will be spent. If you’re vague, lenders might assume you’re unprepared, and that’s a red flag.
What are the interest rates and fees?
Here’s where things can get tricky. Interest rates can vary wildly depending on your credit score, loan type, and lender.
For instance, traditional banks often offer lower rates but might have stricter eligibility criteria. On the other hand, online lenders may approve loans faster but charge higher interest rates. Always compare multiple offers before deciding.
And don’t stop at the interest rate. Ask about additional fees like:
Origination fees
Processing fees
Late payment penalties
Hidden Fees Alert: Some lenders sneak in fees that aren’t obvious upfront. So, read the fine print carefully before you get a business loan.
What are the repayment terms?
Okay, so you’ve got the money. But how do you pay it back? This is where repayment terms come in. Look at:
Duration: Is it a short-term or long-term loan?
Flexibility: Can you pay it off early without penalties?
Monthly Payments: Are the payments manageable with your current cash flow?
Let’s say you’re taking a loan for a small business expansion. If your profits won’t kick in for a few months, make sure your repayment schedule aligns with your revenue projections.
Pro Tip: Use an online loan calculator to estimate your monthly payments. It’s better to know early if you’re biting off more than you can chew.
Am I eligible for this loan? (Eligibility criteria)
Before you get excited, pause and check if you even qualify for the loan you’re eyeing. Every lender has different requirements, but here are some common ones:
Credit Score
A strong credit score (think 700+) gives you an edge.
Business Revenue
If your business is already running, lenders will want to see consistent income.
Time in Business
Many lenders prefer businesses with at least a year of operation.
If you’re wondering how to get a loan to start a business when you’re just starting, don’t panic. Look into startup-friendly lenders, government schemes, or crowdfunding options.
Are There Any Hidden Fees or Risks?
Finally, let’s talk about the “fine print.” Sure, the loan offer might look great at first glance but dig deeper. Are there prepayment penalties? What happens if you miss a payment?
Red Flags to Watch For:
Balloon payments (a big lump sum at the end)
Variable interest rate (it can rise unexpectedly)
Early repayment fees (yes, some lenders penalize you for paying off the loan early!)
When in doubt, ask your lender for a detailed breakdown of all costs and risks involved.
The bottom line
Taking a business loan is a big step, but it doesn’t have to be overwhelming. By asking these five questions—about purpose, interest rates, repayment terms, eligibility, and hidden fees—you can make a smart, informed decision.
Whether you’re trying to get a new business loan for the first time or exploring how to get a loan to start a business, remember: preparation is key. Do your homework, shop around for the best offers, and don’t hesitate to ask questions.
Also, evaluate your financial health honestly and consider alternative funding options if needed. The right loan can be the catalyst for your business growth, but the wrong one can set you back. Stay informed, plan, and approach the process with confidence.
Remember, the more you know and understand, the better equipped you’ll be to make decisions that benefit your business in the long run.
Got more questions? Let’s discuss in the comments below!
