Ask Yourself These Questions Before Taking Out a Small Business Loan

It's a decision you'll want to consider carefully.

There may come a point when you need to borrow money to keep your small business going or help it improve. In 2020, the average small business loan was just over $71,000, according to AdvisorSmith, but you might need a lot more -- or a lot less -- funding depending on your specific circumstances.

The good news is that many banks and lending institutions offer loans to small businesses. But taking one out means signing up to pay interest and having to keep up with payments on an ongoing basis. So before you get a small business loan, ask yourself these important questions.

1. Is now the right time to be investing in my business?

You may be looking at taking out a small business loan to expand your business or invest in new equipment. Before you borrow for that purpose, ask yourself if now's a good time to be borrowing money for these purposes. If your revenue hasn't exactly been steady, then you may want to hold off on expanding or taking on new expenses.

2. Am I borrowing too much?

Maybe you have a specific piece of equipment you want to purchase for your business that will cost $14,000. You may be considering borrowing $15,000 or $20,000 so you have the leeway to fund extra purchases if needed. That logic makes sense, but you don't want to over-borrow if you don't have to.

These days, borrowing rates are up across the board on the heels of interest rate hikes by the Federal Reserve. That means you might spend more to borrow whether you take out a small business loan, a personal loan, or a home equity loan. So it may be best to keep your loan amount as low as possible.

You'll also need to make sure your loan payments are manageable given your business's revenue. Take a look at your banking records to see what sort of payments you can manage.

3. Do I have good credit, and does my business?

When you're borrowing money, your credit score matters. The higher it is, the more affordable it becomes to borrow. But when your credit is poor, the opposite can hold true.

What's more, your business might have its own credit score that can impact your ability to borrow money on its behalf. If your credit, or that of your business, isn't in great shape, then it could pay to hold off on taking out a loan.

4. Is a small business loan really the best option?

Taking out a small business loan might seem like the most appropriate way to borrow when you need money for your venture. But you may also want to explore other options, too. If you have a lot of equity in your home, you may find that a home equity loan or line of credit (HELOC) is easier to qualify for, especially if your credit isn't the best. Both options let you borrow money for any purpose.

The decision to borrow for your small business is a big one. Think things through carefully before moving forward with a loan application.