Before You Take on Debt: 5 Questions Every Business Owner Should Ask

This blog has been shared for informational purposes only and is not financial or tax advice. We recommend speaking to professional tax and financial advisors prior to making major decisions involving your finances.
Colleen Egan, Writer

Every business needs startup capital to, well, get started. Once you’ve established your business, or when you’re ready to take it to the next level, it’s natural to want to start exploring ways to expand your business or upgrade your equipment. As you explore your financing possibilities, small business loans will no doubt emerge as one of your most realistic options.

Walking into a loan meeting at the bank might be nerve-wracking, but in some ways, securing the funding is the easy part. The scary part is taking on debt and creating (and sticking to) a plan to pay it off. So, before you even consider taking out a loan, ask yourself these questions.

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Why am I taking out this loan?

The most obvious question might be the most difficult to answer. It’s also likely one that the bank will ask. Why, exactly, do you need this money? Do you need to buy new equipment for your kitchen? Invest in a marketing campaign? Hire another employee? Open an additional location? Before you ask for a loan, create a plan for the funding — don’t just go after funding because you think you should. And be prepared to explain and justify the cost.

How much money do I need?

Before you set foot in a bank, you should have a specific dollar amount in mind for two reasons. One, so that your lender sees that you’ve given this a lot of thought and are requesting funds for a specific purpose. Two, so that you don’t get in over your head by asking for — and then spending — more than you actually need.

What is the total cost of the loan?

You might be seeking a $10,000 loan, but with application fees, interest, and other costs, the final number might be much more. When you crunch this updated total, does it still work for your budget? Research options from various lenders and pay attention to the fine print. You don’t need to scrap the idea of taking out a loan, but you do want to make sure that you’re choosing the best option for your business.

What does my personal credit look like?

Your credit matters, especially when you’re establishing your business. If you don’t have the greatest credit, be honest with yourself about whether taking on this debt would hurt more than help. On the flip side, if you are confident that this loan will boost your business and that you’ll be able to pay it back within the terms outlined in the agreement, then this loan could actually help boost your credit.

How long will it take me to pay it back?

When you start to think about investing in your business, you should form a good idea of how this money will affect your operations and, as a result, how you’re going to pay it off. For example, if you need a new oven for your bakery, calculate how much that will increase the number of orders you’re able to fulfill, and make projections about how your increased capacity will affect your weekly and monthly earnings.

Colleen writes for Square, where she covers everything from how aspiring entrepreneurs can turn their passion into a career to the best marketing strategies for small businesses who are ready to take their enterprise to the next level.