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5 Questions to Ask before Getting Loans for Small Businesses


Loans for small businesses are extremely complex and should not be taken lightly. Prior to agreeing to the terms of a loan and signing paperwork, it is essential that a borrower asks any and all questions. Listed below are 5 questions every small business owner should ask when getting a loan.

1. The Specific Terms of the Loan

Prior to agreeing to a loan, ask for a recap of the specific terms of the loan--how much money will be lent, the length of time for repayment, the amount of monthly repayment and the exact date the payment must arrive should all be clearly understood by both parties. Also essential is the delivery address for payments and whether you can set up automatic payments from the company's business account. While it may seem silly to ask about these terms, it is quite common for either party to misunderstand the other during a loan transaction, and so therefore it is wise to make sure every party is on the same page.

2. What Happens If a Default Occurs

While you do not anticipate defaulting on the loan, it is important for you to understand the ramifications should that situation occur. Ask what happens if the bank does not receive a monthly payment on time, how long a grace period lasts, how many months the loan can be overdue before the bank will begin collection proceedings and the bank's collection procedures. Make it clear that you do not foresee this being an issue, but that since neither you nor the bank can predict the future, it is better that everyone understands the facts of this potential situation.

3. Whether the Loan Can Be Transferred or Sold

The bank that offers the loan may reserve the right to sell or transfer the loan to another lending institution. Inquire into whether the bank is retaining that right and if so, what notification you are entitled to should the bank decide to sell the loan. While most likely the specifics of your loan will not change, any new transfer bank could try to change the terms or interest rate previously agreed upon. Being aware of this potential, and knowing how far in advance you will receive notice of its occurrence, will save you from being caught. off-guard.

4. Whether There Is a Penalty for Early Repayment

Unfortunately, some banks do not want you to repay your loan faster than in the prescribed amount of time. Banks are paid by the interest you pay on the loan, and faster repayment cancels this income. Sometimes, a bank will require you to pay the full amount of interest on a loan despite the fact that you are repaying the principal balance earlier than required.

5. Who to Contact for Further Questions

The bank representative selling you the loan may not be your contact for future questions. Make sure to obtain the name, phone number and address of the location and individual responsible for managing your loan in the future. Having this information on hand from the outset will prevent you from later having to track it down when you do have a question.

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