4 Questions to Ask Your Small Business Lender

The best time to ask your small business lender questions is before you sign anything. It is important to know exactly what your commitments will be when you close the loan. If you discover you are unhappy with certain provisions of your loan after signing the closing documents, it can be too late to change anything because the documents you sign are legally binding. There are a few  important questions you should ask before you sign.

1. What is the Cost?

The cost of your loan is more than the amount of interest you will pay. It includes all fees and charges associated with obtaining the loan. It may include document preparation fees, processing fees, underwriting fees, etc. If a broker introduces you to the lender, fees for this service may also be included. Make sure all charges are clearly spelled out. Your loan officer should explain every fee and you should ask these questions about the cost of your loan:

  • What charges are included in the loan? 
  • How much will be expected at closing?

At this stage of the loan, it is possible to have fees eliminated. If any fee seems unreasonable, challenge it. It is very important to know exactly what you are paying.

2. What are the Loan Requirements?

It is not uncommon for business loans to have special financial requirements and conditions included in the loan agreement. For example, you may be required to open an account with the lender, maintain a certain level of insurance or achieve specific financial results. If you fail to meet theses requirements, your loan can be legally deemed to be in default. Therefore, you need to have a clear understanding of all the requirements. You should determine if you will be able to meet all of the covenants. If you believe they are unreasonable, you can attempt to negotiate for more reasonable requirements. If the covenants are too strict you may want to reconsider the loan.

3. What About Collateral?

Many lenders require you to pledge some of your personal or business property to secure the loan. If a lender requires collateral, make sure you have a clear understanding of the requirement. The key question to determine is whether the request is reasonable. The lender needs to justify the need for collateral.  As you pay down your loan and establish a credit history with the lender, this requirement should change.

4. Are There Prepayment Penalties?

Some loans contain penalties if the loan is paid ahead of schedule. This is a huge advantage for the lender and a huge disadvantage for the borrower. You will want to know if your loan has this type of provision. If your business prospers more than you expect, it will be to your advantage to prepay without penalties. If your loan contains prepayment penalties, before you sign documents is the time to discuss them.