Start-Up Loans: Top 5 Questions to Ask before Borrowing

Start-up loans for new businesses are more accessible today than they have been at any point since the start of the 2007/2008 financial crisis. Still, many new business owners can find themselves scratching their heads. They don’t know what to do, where to go, or even how to start the process of securing funding.

This lack of knowledge is the foundation for disaster if a new business owner does not get some direction. A good way to get that direction is to step back and ask some important questions. Asking them, and then finding out the answers, will quickly help the new business owner get his or her thoughts in order.

Here are the top questions to ask before applying for start-up loans:

1. How much money do I need?

This first question may seem self-evident, but it is surprising how many new business owners do not consider it as carefully as they should. Here’s the thing: start-up loans are intended to provide new businesses enough funding to get off the ground. The new business owner doesn’t know how much to borrow if he or she doesn’t know how much it will cost to get up and running.

2. What will I spend the money on?

Hand-in-hand with knowing how much money to borrow is knowing what the funds will be spent on. A brick-and-mortar start-up may need a tremendous amount of capital to cover investments in equipment and facilities. An online business might put most of the start-up funding into digital marketing.

The point is that business owners have to decide how they intend to invest their financial resources before they can make any realistic plans for borrowing. Not only that, lenders are most certainly going to want to know how start-up loan money will be spent.

3. How quickly do you need the money?

This question has made the list for one very simple reason: desperate people tend to make unwise decisions. If the idea for a new start-up is a good idea, it won’t hurt the new business owner to wait a few weeks to secure funding. Good ideas just don’t die that easily.

On the other hand, a new business owner desperate to get funding now before some wonderful opportunity slips away is probably looking at something that should be avoided. If an applicant cannot wait a little bit to get funding, he or she should probably just turn and walk away.

4. How quickly will I be able to repay the loans?

Start-up loans can be obtained as either short- or long-term instruments. The shorter the term, the higher the interest rate generally applied. The upside is that paying off the loan sooner will free the new business of that financial obligation.

The reality of short- and long-term funding dictates that the business owner realistically assess how long it will take to repay any and all loans. A business owner must also assess whether or not the business can survive long enough to make good on those loans.

5. What do my personal finances look like?

Banks and private lenders tend to be wary of new start-ups because such businesses do not have a track record to look at. As such, they have no choice but to look at the personal finances of loan applicants. New business owners need to take that into consideration. An applicant whose personal finances are messed up is going to have a difficult time obtaining start-up loans.

Securing funding for a start-up is not necessarily an easy process. It is not impossible either, but it does require quite a bit of thoughtful consideration and hard work. If you are thinking about applying for a start-up loan, step back and ask yourself these five questions first. How you answer them will dictate how you go about obtaining your funding.

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