5 Things you must know before taking out a business loan
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Although every business has a different strategy, they all could do with more capital. Business loans can give a business the much-needed boost in financial stress by normalising its cash flow cycles. Additionally, you can use them to launch or expand an existing business.
Fortunately, there are various ways for a business to receive financial aid. One is to invest profits back into the business. You can also look for investors for capital injection, which might mean that you part with a share of your business in addition to repaying the investors.
The other option is a business loan, which is an excellent option since you'll only acquire debt but you won't lose control of your business. However, before you can opt for the business loan option, there are various things you must know. These things will determine the success or failure of your loan application.
Here are the things you must know before taking out a business loan from Fast Business Loans or any other reputable sources:
- The lender options
There are different types of lenders, but they're primarily categorised into two groups: traditional and non-traditional lenders.
Examples of traditional lenders are credit unions and banks. Their repayment rates are relatively lower and they have friendly repayment terms. However, their rules on collateral, cash flow requirements, and credit are quite strict. They also need a myriad of documents, including tax returns and financial statements.
On the other hand, most business owners prefer non-traditional lenders to traditional lenders because they have fewer demands on documentation. Also, even if the traditional lenders' loan process is shorter, their interest rates are higher.
Here are other reasons to get a business loan from non-traditional lenders are:
- You're relatively new in business
- You need quick financing
- Your credit score is low
- You're unable to get a traditional loan
- Interest rates
Lenders won't give you a loan for free. Instead, they charge interest that you have to pay alongside the loan repayments.
This being said, you must do some research on different loan providers and their interest rates. Your choice should be the lender with the lowest rates. Always keep in mind that the amount you'll end up repaying depends mainly on the loan duration and interest rates.
If you acquire a loan with low interest, your repayment amounts should be within reasonable limits. Also, ensure to know if there are other charges you'll incur on top of the interest.
- Type of loan you need
The amount you're borrowing depends on the reason for taking out a business loan. It could be expansion, financing business expenses, asset acquisition, etc.
Thus, have a clear budget with reasonable estimates. This is especially important since lenders need a reason why you need a loan. If your lender notices overly high or low estimates, they may question your credibility.
Here are some types of business loans your business can benefit from:
- Business term loans: These are business loans commonly offered by traditional lenders, especially banks. Lenders give businesses a lump sum and the latter will make monthly repayments over a fixed term. The repayments premiums include interest that's paid on top of the principal amount. You can use the loan amount for any business needs you have.
- Small business administration (SBA) loans: These are low-cost government-backed loans that are generally low-cost. However, such loans have a reputation for having a relatively long application process. They can end up taking too long before disbursement, which means these aren't suitable for emergency needs. But if your needs aren't too urgent, they can be quite beneficial as they offer lower interest rates and fees.
- Equipment loans: If your business requires financing equipment but doesn't have enough finances, some lenders offer these loans. The loans are fashioned to help business owners purchase expensive equipment and vehicles.
- Business lines of credit: They work similarly to a credit card. The lender gives you a loan limit where the interest is charged only on the amount you borrow. You can borrow and repay as many times as you need as long as it's within your limit.
There are other types of business loans that aren't in the list above. They include receivable financing, merchant cash advance, working capital loans, or borrowing from family and friends.
- Creditworthiness matters
Lenders will look at your business' possible ability to repay the loan without defaulting. Your credit score determines this. Your personal and business credit history is evaluated and used to determine your creditworthiness. A high credit score, mostly a score of 700 and above, indicates creditworthiness.
If there's an error in your credit score, ensure you have it sorted out before starting the loan application process. If you have a low credit score, improving it will give you a chance to qualify for higher credit.
- Documents required
The process of applying and acquiring a loan has some formalities you need to meet. Quite a number of documents will also be required. This will help the lender ascertain the legal existence of your business and its current standing. Ensure you have these documents before you begin the process. However, they may vary depending on your lender.
Have your business' legal documents such as franchise agreement, certificate and articles of incorporation, commercial lease, and such.
- A business plan
- Personal and business tax returns
- Financial statements for the business
- Personal and business bank statements
- Proof of collateral
Takeaway
Business loans can offer the needed boost for your business and its operations. If you're planning to take a business loan, have a clear plan of how you intend to utilise and repay the loan. Also, educate yourself and consider the advantages and disadvantages of taking out a business loan.
