Every small business owner contemplates on the pros and cons of taking a business loan. If you see an opportunity for adding value to your business that necessitates you to spend more capital than you have in the bank, a business loan may be the answer.
But, bringing on more debt is a risky decision for which careful planning is necessary. So, before you take a business loan, here are some top questions that you have to ask yourself before taking out a business loan.
Do I Need A Business Loan?
This is the first and the most important question that you need to ask yourself. You should never opt for credit just because you have to do it.
It should add value to your business or otherwise increase your return on investment. Only once you have exhausted your other options, you should go in for a business loan.
How Much Do I Need And Why?
Taking the time to write or update your business plan will help you answer this question. A plan for why you need this loan and how you are going to repay it back in writing is usually required by lenders before you get the approval for a loan.
What Kind of Loan Is Best For Me?
There are multiple options available for loans in the present day. Apart from the traditional term loans available from banks, there are online lenders that offer term loans, lines of credit, invoice financing, and more. Maybe a business credit card will fulfill your requirements instead of a long term loan.
How Much Outstanding Debt Do I Have?
Having outstanding loans may impact loan approval, interest rate for the loan, loan terms, and loan amount. So, before you take a business loan, evaluate how much outstanding debt you have.
What Does My Credit History Look Like?
Analyze your personal credit history and your company’s credit history. What do they look like? Your credit scores and histories play a major role in determining your loan eligibility and also the interest rates you pay.
You should consider spending more time improving your credit history if you are looking for the lowest rate. Paying your bills on time and completely is one of the best ways to enhance your score.
What Aspects Will Be Considered When Computing The Business Loan Interest Rate?
This is the most important question you should put forward to your lender. The interest rate is usually determined majorly based on your credit score and income.
But, these are not the only aspects. Lenders also take into account the age of your company, financials, business type, and debt-to-revenue ratio.
These criteria not only furnish financial institutions with information about your company’s finances but also aid them to comprehend how you can pay back your debts.
What Tenure Should I opt For?
The shorter your tenure is, the higher are your EMIs. However, it also means that you can clear off your debt quickly. So, how do you determine the loan tenure? You can use an EMI calculator and check the best possible combination of amount and duration for yourself.
Can I Provide Collateral or A Personal Guarantee?
You can often get better loan terms by providing some kind of collateral or a personal guarantee. In this case, if you default on the loan, the bank can take possession of your asset or take action against you to regain their funds. It is a bigger risk, but it could be in your favor.
Do I Require A Co-Signer?
You can add a co-signer to your loan if you wish to have somebody else who is legally liable for the loan. If you are in a business partnership, then your partners have to sign the loan as well. Having a co-signer will also improve your loan eligibility.
How Quickly Do I Need Funding?
The funding process when applying for a loan through a bank or via any other financial institution is calculated in weeks and months.
If you don’t need money urgently, you can actually wait to see what they offer you. But if you are in a critical situation and need money desperately, then online lenders can turn your application around and provide finance as soon as one business day.
How Much Can I Afford To Pay Per Month?
The hunger of the loan amount and shorter the time duration, the higher your monthly payment will be. You need to ask yourself if your business afford this and how it might affect your bottom line profitability.
How Strong Is The Business Plan?
Most lending institutions will desire to look at your business plan before giving you a loan. They will verify parameters like your monthly recurring revenue, expense, and other debt obligations.
Ensure that your plan is good and it will make a strong impression before approaching a potential lender.
How To Choose The Lender?
The best answer to this question is to do research and compare. You should opt for a lender who offers feasibility, affordability, and good terms for the loan. Also. look to negotiate for a lower interest rate.
What Is The True Cost Of This Loan?
Before taking a loan, make sure that you understand the exact amount you are borrowing and what it really costs you from origination fees to prepayment penalties.
Know About The Particulars
Before finalizing any loan, make sure you read what is there in fine print thoroughly. Business loans sometimes come with complex terms that can be hard to comprehend. Before you opt for the loan, you should be aware of and understand the terms thoroughly. Look for
- Penalties for prepayment.
- Late payment fees, payment schedules, and grace periods,
- when the interest rate will change assuming that they will keep altering.
- The consequences of defaulting on the loan.
These questions above are the basic ones that you need to ask yourself before applying for a business loan. You can contact friends and known people who have taken business loans before and explore other possibilities that you need to consider before taking out a business loan.