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If you need money for your business, it can be very tempting to go for the first business loan offered. However, there are a few things to keep in mind before drawing on the dotted line.
1. The right loan form
As with personal financing, there are different forms of business loans, so you should choose the one that best suits your business needs.
- Traditional Loans: This is the business equivalent of a personal loan, which can be secured or unsecured. You borrow a fixed amount and have a fixed repayment schedule with a fixed interest.
- Credit line: A line of credit gives you a fixed amount of financing, but you don’t have to receive and pay interest on the full amount. You can withdraw money when you need it and you only pay interest on the amounts you borrow.
- Equipment Financing: If you need money to buy equipment, this type of business loan is designed to meet your needs. The device you buy acts as collateral for the loan, so you can usually take advantage of more flexible terms.
- SBA Loans: SBA or Small Business Administration loans are an option if you are struggling to qualify for a business bank loan. The lending criteria are more flexible, which could be a more pleasant choice for new ventures.
Before agreeing to a business loan offer, it is worth reviewing the other types of business loans to confirm that the loan is the best fit for your business.
2. Manageable loan repayments
Before signing the loan contract, you should have the opportunity to check the details of the loan loan repayment requirements. You need to think carefully about whether you can comfortably fit the monthly payment into your budget, not just now, but throughout the life of the loan.
If you’re concerned that payments may be difficult, or if you’re struggling to meet payment deadlines, it’s best to look for another loan product. Missed or late payments can not only cause additional financial stress, but can also have a huge impact on your credit rating.
Related: The 7 Different Loans You Can Get As A Business Owner
3. Reasonable loan costs
This follows on from the previous point, but you also need to be complete know what fees that you get with your new business loan. In addition to paying interest, there may be a setup fee and processing fee. These will be added to the principal of your loan or you will have to pay them in advance. Ideally, your new business loan will have few or no such costs.
You should also pay attention to the costs that you may incur during the term of the loan. For example, you don’t want to be saddled with a huge fee for being late if there’s a mix-up at the bank. It’s also a good idea to keep an eye out for early repayment fees. If your business finances change and you want to liquidate the loan, you don’t want a loan that imposes a hefty prepayment fee.
4. A good lender reputation
Unfortunately, not every lender in the market offers the same level of service, some can even be downright risky. The adage “too good to be true” certainly applies here. So it’s vital to research the lender’s reputation and look out for some red flags. These include:
- No requirement for a credit check: If a lender does have minimum credit score requirements or no check of your credit score required by soft or hard pulling examination.
- No verifiable references: If the lender does not have a professional website and does not provide details of a physical address.
- Lack of tariff transparency: Lenders should be very clear about their loan fee structure so that you are fully aware of how much the financing options will cost.
- Sell pressure: If the seller tries to pressure you to immediately accept a business loan offer without giving you information and time to study it.
5. The correct loan amount
While it may be tempting to get the largest business loan you can get approval for, it’s probably not a good idea. Likewise, if the loan offer does not cover your immediate financing needs, it is not the right choice.
Think carefully about what money you need and how you will use it, so that you are sure that you get a loan for the right amount.
6. An attractive interest rate
As with any form of financing, your interest rate determines the cost of your business loan. Lenders will use different criteria to determine your risk profile and therefore your rate. However, these criteria vary from lender to lender, with some lenders being stricter and some lenders more flexible.
If you’re running a brand new venture, you’re not likely to get the best rates unless you have excellent credit yourself. But it’s still important to compare rates to make sure you’re getting the lowest possible rate for your business.
However, you may be willing to pay a slightly higher interest rate if there are minimal fees or other benefits associated with the loan. So don’t look at the interest rate comparisons without any context.
Related: 3 Different Types of Business Financing and What Entrepreneurs Need to Know
7. A reasonable financing time
While you may not need the money urgently, you probably want to get your plans done as soon as possible. So check the financing times each lender offers for their business loans. When can you expect the money in your bank account after you have submitted your application and received approval?
Some lenders can release funds in 24 hours or just a few days, but other lenders are slower. If you have to wait weeks or months for your money, it’s a good idea to look at alternative options.
8. Solid customer support
Finally, it’s worth checking the levels of customer support offered by your potential lenders. If you have questions or queries about your loan, can you speak to the support team quickly? Some lenders have telephone helplines, while others rely solely on email or chat. So you should be familiar with the customer support options.
It’s worth reading some of the lender’s reviews to see if there are any red flags about long wait times on calls, slow responses to emails, or other customer support issues before you become a customer.
It boils down
Getting the right business loan for your needs takes some time to compare the different aspects and lenders. When you follow the above factors and make sure you maximize all of them, you can save money, time and financial stress.
