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CEOs

4 Questions to Ask When Evaluating a Business Loan

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When considering a business loan, the natural instinct is to ask “what will this cost?” or “what is the rate?” While APR is an important consideration, it cannot be looked at in isolation.

When it comes to a business loan, there are many factors to consider.

  1. What will the monthly payment be?

This is impacted by the amortization of the loan and whether or not it is a revolver or a term loan.  You have to be comfortable that the loan will be able to work with your cash flow.  As an example, it might make sense to pay a slightly higher rate, in exchange for a longer amortization and lower monthly payments.

  1. Is the rate of the loan fixed or variable, and if it’s fixed how long is it fixed?

If it is variable are there caps on how high the rate can go?

  1. What will it cost to get in and out of the loan?

Are their points up front and what are pre-payment penalties if you get out early? Upfront points can dramatically increase the APR, and you have to think about the flexibility on the back end.  Entrepreneurs often don’t pay attention to pre-payment penalties and the term of the loan.

  1. What lien and personal guarantee is the lender placing on you?

If it’s a personal guarantee are you comfortable with it and if you have partners are you sharing the load equally?  If the lender is taking a lien on your business, is it on specific assets or is it a blanket on the company?  If it’s a blanket lien, and particularly if it’s the first lien make sure you are giving away your first position for the maximum borrowing base possible.  Remember that once you’ve given away your first lien, a loan is second lien position will likely be more expensive.

When reviewing the issues above it’s important that you take some time to think about a business loan decision. It’s smart to try to get a few different options, and that the differences between them will help you make the best possible decision.  APR matters, but it’s not the only issue that counts.

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