A Small Business Administration (SBA) loan is often the best choice for a business looking for funding. The term on the loan is usually longer that other loans, and at least a part of the loan is guaranteed by the government. However, they are certainly not the only kind of small business loan, nor are they right for any given situation. 

Before you take out an SBA loan, you need to ask yourself these 5 very important questions.  

How Much Money Do I Need? 

When getting any business loan, but especially an SBA loan, one of the most important things to ask yourself is how much money you really need. This is largely related to the reason you need the money, what resources you have now, and what the difference between those two might be. 

This means you need to have a good plan, a budget in place, and you need to know both hard and soft costs you might encounter along the way. If you are looking to expand your business, engage in more marketing activities, or buy new equipment to increase efficiency, an SBA loan may be a great choice. 

The key is to know the amount you have in mind before you approach a lender, and make sure that you can afford the loan long term.  

How Soon Do I Need the Money?

This is an important factor in choosing the type of business loan you need. An SBA loan requires a lot of paperwork and goes through a strict approval process. This means that getting this loan and receiving the funding takes some time: typically, from 60-90 days. 

If you have a more urgent need other types of funding may be a better answer. Also, remember that this time frame also largely depends on how quickly you assemble and submit the paperwork the SBA needs, and if they have to come back and ask you for more information. The better organized you are at the outset, the faster your loan can be approved. 

How Long Will It Take to Pay the Loan Back?

Terms vary a great deal on SBA loans, from 5 to 25 years depending on the type of loan and the amount you borrow. This also depends on the lender and their terms. This is one of the things you should consider when taking out an SBA loan. 

The purpose of the loan is key. Are you fixing a short term financial need, or are you looking to solve a longer-term problem by having money on hand to meet certain expenses and needs? Another factor to consider is what kind of payments you can afford, and what the long-term cost of the loan will be. 

Typically, the longer the term, the lower the payments on the loan will be, but also the greater overall cost. This is why it is very important to use an SBA loan calculator and look at the actual APR. This APR can include any fees and give you a solid picture of the overall cost of your loan.  

What is the Interest Rate?

Of course, this brings up the question of the interest rate and what that actually means. The reason this is sometimes unclear is that each lender shows you the interest rate on your loan, but not always in the same way. Also, as mentioned above, the interest rate often does not include fees that go with the loan, which actually increase the overall cost. 

One other important factor is to make sure that the interest rate is fixed, and not variable. The latter can mean your payments could go up dramatically with little or no notice. Variable rate loans are rare in today’s financial climate, but double checking is always a good idea. 

Fees are also often expressed in percentages, so they vary depending on how much you borrow. This means overall the interest rate is increased by that percentage, so be sure to take than into account when applying for the loan. 

Is There a Pre-Payment Penalty?

Of course, the most ideal situation is for your company to be debt free. This means that if possible, you want the option to pay off your loan early. However, some lenders actually have a penalty if you pay off a loan before it matures, called a pre-payment penalty

This is not something that should necessarily deter you from taking out a particular loan, but it is something you should factor in when considering which loan to choose. If you think you might want to pay it off early, you need to factor that fee into the overall APR. 

Applying for an SBA loan is a process. It takes time, and you need to know why you need the money, how soon you need it, and if you can afford the overall cost of the loan. This will be affected by the interest rate and any penalties, including if there are penalties if you pay the loan off early. Ask yourself these five questions before you start the process to ensure that you are ready to apply and get the best business loan possible.