The important question you should ask (but don’t) when applying for a business loan.

As a business owner who is considering a loan, the type of questions you ask yourself tend to focus on what the interest rate and fees for the loan will be. As well as how long will the loan term be and how likely you are to be approved. 

While these questions are important, they should come later. There is one question you should be asking yourself first. But it’s an often-overlooked question and one that we don’t see business owners consider upfront in most cases. 

The question is: WHY NOW?

Why now do I need a business loan?

We will often have a business owner approach us for a short-term loan and say, for example, that they need to go on a marketing drive. My first question to them is always - but why now? 

Responses from business owners often focus on the issues of their business losing market share or the business owner or staff are making rash decisions because sales are low, and they are in panic mode. 

This is always the first sign for us that it’s perhaps not the best time for this company to take out a loan. Because it’s never a good idea to get a loan or make major decisions in your business in panic mode.

When you’re making a business financial decision in a short timeframe and under emotional duress, it’s unlikely the outcomes are going to be what you want. The best thing you can do when you are in panic mode is to stop for a moment. 

Catch your breath and let your calm mind take control again. Then look for and consider rational options and ask yourself again why is it now that I need the money? 

Don't decide in panic mode

The key here is to take the panic out of the decision-making process when applying for finance. In fact, this can extend much further than just applying for a loan. Making any kind of decision in panic mode for your business is dangerous. Don’t cut staff or engage in marketing you have not researched while you are panicking. 

We saw back in the GFC, many businesses went into panic mode. Instead of going back to basics and focusing on the core activity that made their business successful, business owners started trying to think differently. With many chasing unrealistic projects and relationships to try to save their business, instead of homing in on what they already do best.  

Make business loan decisions with a clear plan

On the flip side of business owners coming to us in panic mode, we will have a business approach us and say that they are ready now to execute a marketing plan that requires short term funding. We will discuss with them and discover that they have been working on the marketing strategy for the past few months and now the time has come now to execute it. 

This is a decision in their business they have made months ago, with considerable thought involved, and panic mode has not entered the equation, because the decision to obtain finance has been coming for a while now.

As a business owner, the key to securing short term funding is ensuring you have prepared in advance. Map out how the funds will help your business to operate and grow and why the time is now for you to move on an opportunity that presents itself.

By taking the time to go back and consider your business or marketing plan you can organise your ideas and have a good idea of if you can handle the challenges that come along with obtaining finance and create a plan moving forward. 

You need to have a plan for the money 

Ask yourself why do you need a loan? It seems like a straightforward question, but it’s a question often overlooked by business owners, especially when they add now to the end of the question. 

By ensuring you take the time to identify the loan purpose you’ll know you are obtaining finance for the right reasons. It’s not uncommon for a business owner to be convinced that throwing money at a problem is the way to solve it. 

But there are costs associated with borrowing so you need to consider if the funds will add value to your business, or it is simply a stop-gap solution to a cash flow concern that will be resolved in the short term because you have the income due to come into the business soon.

Questions to ask yourself before obtaining finance

Over the past five years helping hundreds of small and medium business owners I’ve uncovered four core questions that each business owner should focus in on before submitting their application for finance. 

The first question is am I panicking? Am I worried about my business and my decision making in panic mode right now? If the answer to this question is yes, then I would suggest to the client to reconsider whether the loan is what they need. 

If the business owner is not making a decision from being in panic mode, then I would get them to ask themselves the second question.

Is what I'm facing a money problem or a business problem?

Is money the only solution to resolve your issue? Because if you have a business problem such as a toxic employee, a product that is not relevant to the market or simply a market that is dying, then throwing cash at those types of problems will be ineffective. 

Before seeking additional funds for a business challenge, it doesn’t hurt to seek other sustainable solutions that will keep you out of debt. Consider if you are looking for a loan for an immediate fix, or is there a long-term benefit for the funding? In the end, a loan may turn out to be the best outcome but by considering all options first you have done your due diligence and can be confident you are making a decision from a place of reasoning.

What is your vision for the funds?

The third question to ask yourself is do you have a clear vision for the funds? Or do you know exactly what you will do with the money you receive? And answering this question with a general “to grow my business” isn’t enough. Like we touched on earlier, you should have solid plans for how you’ll use your loan. This could include:

• being used to implement a marketing campaign to grow your reach
• expanding into new geographical regions
• managing seasonal fluctuations in your business
• as a means to hire new employees 
• providing a solution add more stock at a discounted rate
• capitalising on a golden opportunity that presents itself

Without a clear understanding of how your loan will help you grow your business; you probably shouldn’t apply for one just yet. You want to back up your decision making with due diligence first. 

The final question to ask

If you can confidently know your vision for the funds then the final question to ask yourself as a business owner, is do you have a clear grip on your outgoing expenses? And can you safely absorb the interest costs of a loan?

If you can answer all four of these questions and give honest answers, then you’ll find yourself better prepared to successfully apply for a small business loan that offers a smart solution for you to move on market opportunities. 

Especially in the current depressed economy, favourable discounts on stock and equipment can mean even with the interest on a loan you can come out ahead. It’s also a good time to capitalise on marketing opportunities as advertisers are willing to offer discounts on advert placements. By investing today, you can find that the cost can be lower. Keeping you are one step ahead of the competition when the economy rebounds. As it always does. 

Let us help you 

The team at Smart Advance don’t just take every loan application that comes our way. We want to know that you have a plan in place, and we are here to help you execute your business strategy and capitalise on the unique opportunities that present themselves.

For more than five years we've helped hundreds of small and medium businesses secure finance without any asset security needed.

With flexible loans from $5K to $300K, no hidden fees and highly competitive rates, the only question left to ask is why do you need a business loan now?

https://smartadvance.com.au/

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