Running a small business can be demanding but fulfilling, and it’s not always easy to know when it’s the right time to take out a business loan. A loan can be requested from a bank or a credit or finance company and can be used to finance a project or solve an emergency. Although a loan can sometimes be the ideal solution, it is also important to know when to say no. Let’s explore some of the things to consider when trying to decide on a business loan.
One of the first important things to think about is the purpose of taking out a business loan and what you are aiming to achieve with the financing. Refer to your business plan to make sure your need for money matches your organizational goals.
Although there are many types of business loans in different forms, in general there are two categories – an equity loan or debt financing.
An equity loan is usually taken out by a new company that may face future uncertainties or by a company that makes large profits but has a low credit rating. An investor buys shares of the company and you lose some control and some of your profits.
Debt financing is typically used by established businesses that are able to demonstrate consistent profits and guaranteed collateral. A lender provides capital that must be repaid over time with interest, at which point all obligations to the lender end.
Lenders will have different requirements, but be prepared for them to want to know:
- Your business income and expenses;
- Any warranty to which you have access;
- Any debts you already have;
- Who you do business with;
- Your credit score.
Some lenders will perform a criminal background check, and others may want to see a business or improvement plan. To help a lender assess whether to offer you a loan, be prepared to disclose as much information as possible about the financial health of your business.
Collateral refers to any assets you own, such as property, land or equipment, which can be sold to obtain funds to repay the loan if you do not meet the repayments. Before taking out a business loan, it is essential that you know how you will repay it when the time comes. You might want to consider selling some of these resources now instead of taking out a loan. However, never take out a loan that you have no intention or means to repay, as this will only plunge you into a quagmire of debt that increases with interest.
Lenders are willing to lend money to businesses that have a good credit rating, as this will demonstrate your ability to pay on time. The higher your credit score, the more favorable terms you can get with greater savings and benefits.
Amount of the loan
The amount of loan you need usually depends on what you intend to spend, but also on the fees that need to be paid. Be sure to include the fee in the amount you are requesting, as not all lenders will provide you with the full amount you are requesting.
The interest rates provided by the lender are often determined by the type of loan you want and your credit history. The lower the rates the better, so you pay less in addition to repaying the loan amount. Compare multiple quotes to get the most competitive rate possible. Check out MarketFinance, which is transparent with its fees and flexible with its repayment terms.
Make sure you know the term of the loan, how often you will need to make repayments, and the amount of each repayment. Some loans have short terms that require large periodic repayments, while long-term loans may require smaller repayments but more interest.
Find out how flexible your lender will be if you’re struggling to make repayments – will they give you extra time and will there be late payment fees? Alternatively, you may want to make early or larger payments if you suddenly have access to extra cash – if the lender allows you to repay the loan early, will there be any penalties or exit ? If your business has to meet seasonal demand or if you need funds while you wait for your debtors to pay you, a flexible loan may better meet your needs.
Reputation of the lender
Just like a lender checking your eligibility for a loan, you also need to check the lender’s eligibility to make sure you don’t fall prey to a loan shark. Longevity in the market is a good indicator of an established and experienced lender, and a reputable company will always be willing to answer any questions you may have. Read reviews on their website and social media pages to see what others are saying about their experience with them.
Once you have been accepted for your loan, there may be more to do before you can start using the funds. Make sure you stick to the spending limits set out in your loan agreement. If you fail to repay the loan, you could be personally liable to pay, assets could be seized and your business credit score could suffer, making it difficult for your business to borrow money from coming.
While it’s not a good idea to take out a loan that you know you won’t be able to repay, refusing to consider a loan can hinder your business. Funding can be used to help you grow and grow your business, bridge cash flow gaps, or manage an emergency. By doing your research on the different lenders and their terms, you will be able to find the right loan that meets your business needs without jeopardizing the future of your business.
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