Look around and you’d be hard-pressed to find a business that hasn’t obtained financial assistance at some point during its growth. Whether it’s to get established, build credit, purchase inventory or facilitate expansion, there are some perfectly valid reasons to go into debt for your business. This article is for you to know key Important things to be considered before applying for a small business loan.
It should come as no surprise then that modern businesses have access to a dizzying range of financing options. The days where your local bank was the one-stop-shop for any form of credit have long passed. Consequently, it pays to make the necessary considerations before obtaining a loan. Here are some things to keep in mind.
Important Factors to be considered before Applying for a Business Loan
Do you know how to start a business from scratch? Let us learn step by step. Here we will try our best to enhance your knowledge on some of the key important things to be considered before obtaining or applying for a business loan.
Borrowing as much as possible is a common mistake. The costs associated with the amount you want to borrow need to be thoughtfully considered. You should know exactly how the borrowed funds will provide a return or add value to your business. By identifying the ideal amount to borrow, you can determine which lender to approach. This is one of the key important factors you should considered before applying for a business loan.
Banks, for example, would rather lend high amounts to offset the administrative and regulatory costs involved. If you only need a small loan, look for a lender that specializes in small amounts. They will be more receptive to a loan application and you’ll probably receive a lending decision faster.
It seems rather obvious but knowing exactly why you need the extra capital is key to answering the questions that will inevitably arise later down the line. This includes identifying whether you’re meeting a long vs short term need.
For instance, the right approach to financing a quick stock increase is decidedly different to that of obtaining capital for a property expansion. In this case, it wouldn’t make sense, for example, to agree on a years-long repayment plan for stock that will be sold within a few months.
As a general rule, longer terms have lower installments, but a higher total repayment. Knowing this can help you determine when it’s possible to choose a shorter-term loan option and subsequently reduce the total interest paid. Ideally, borrow over a shorter term, as this reduces the amount of interest you pay, but balance this against your cash flow needs. Higher repayments might be beneficial, but not if it causes you cash flow problems later.
Both your personal and business credit score can influence your success things to be considered before applying for a small business loan. Depending on the size and structure of your business, your personal score may play a larger role during evaluation. Some lenders may accept a lower score provided other metrics indicate a reliable borrower.
While an impeccable score is no guarantee of obtaining financing, establishing and maintaining a healthy rating can help you benefit from lower rates and make you eligible for more suitable loans. So, be sure to consider the state of your credit profile before applying.
You can check your credit score by requesting a free credit report from one of the three main credit reporting agencies. This costs nothing as long as you don’t do it more than once a year. Go over your credit report and make sure that there are no errors. If you do spot anything, report it immediately, as it could jeopardize your ability to obtain credit.
Another factors to be considered before applying for a business loan is to identify how quickly you need it. Some purposes don’t allow the luxury of waiting weeks for access to funds. By the time you’ve settled on a specific lender, be sure to determine whether you will be able to use the money for its intended purpose before it’s too late.
Short-term lenders typically approve a loan within a day and you can have the money in your account within a couple of hours. If you need a larger business loan from a mainstream lender, it may take several weeks before a decision is made by the loan officer. Factor this in when choosing a lender.
Consider Alternatives to a Loan
Whilst business loans are often a useful source of funding, but they are not the only one source of finance for business. These days, it’s easy to find funding from a variety of different places. If you need money to fund a new product you want to develop, why not try pitching for money on a crowdsourcing platform like Kickstarter? It’s a useful way of seeing if your idea is viable.
Another option is to see if you can find an Angel Investor who is willing to put up some money in return for a share of the business. This won’t suit everyone, but it does have merits.
The more informed your decision, the better the outcome. Here we have seen key important factors to be considered before applying for a business loan. Remember to choose a lender that is trustworthy, reputable, and able to provide a loan that’s in-line with the needs of your business.
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