When to Consider Taking Out a Business Loan

Running a small business can be demanding yet 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 sought from a bank or a credit or finance company and can be used to fund a project or solve an emergency. While a loan may be the perfect solution at times, knowing when to say no is important too. Let’s explore some of the things to consider when trying to decide whether to take out a business loan.

Goal

One of the first important things to think about is the purpose of taking out a business loan and what it is that you aim to achieve with the funding. Refer back to your business plan to make sure that your need for money aligns with your organizational goals.

Source

While there are many types of business loans under different guises, in general, there are two categories – an equity loan or debt financing.

An equity loan is usually taken by a new business that is likely to face future uncertainty or a business that has large profits but a low credit rating. An investor buys shares in the company, and you lose some control as well as some of your profits.

Debt financing is usually used by established businesses that are able to demonstrate consistent profits and guaranteed collateral. A lender provides capital that must be paid back over time with interest, at which point all obligations to the lender ends.

Lender Requirements

Lenders will have differing requirements, but be prepared for them to want to know:

• Your business income and expenses;
• Any collateral you have access to;
• Any debts you already have;
• Who you bank with;
• Your credit score.

Some lenders will carry out a criminal background check, and others may want to see a business or improvement plan. To help a lender to evaluate whether they should offer you a loan, be prepared to disclose as much information as possible about the financial health of your company.

Collateral

Collateral refers to any assets that you have, such as property, land, or equipment, that can be sold to obtain funds to pay back the loan if you fail to meet the repayments. Before taking out a business loan, it is essential that you know how you are going to 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 don’t have the intention or means to repay, as this will only push you into a quagmire of debt that increases with interest.

Credit Score

Lenders are willing to lend money to companies that have a good credit score as this will demonstrate your ability to pay on time. The higher your credit score, the more favorable terms you may be able to secure with greater savings and benefits.

Loan Amount

The size of the loan you need usually depends on what you intend to spend the money on, but also any fees that need to be paid. Make sure that you include the fees in the amount that you apply for, as not all lenders will provide you with the full amount that you ask for.

Interest Rates

Interest rates provided by the lender are often determined based on the type of loan you want and your credit history. The lower the rates, the better, so that you pay less on top of repaying the loan amount. Compare multiple quotes so that you can get the most competitive rate possible. Check out MarketFinance, which is transparent with its fees and flexible with its repayment terms.

Repayment Terms

Make sure that you know how long the term of the loan is, how often you will be required to make repayments, and how much each repayment will be. Some loans have short terms that require large periodic repayments, whereas long-term loans may require smaller repayments but more in interest.

Find out how flexible your lender will be if you are struggling to make the repayments – will they give you extra time, and will there be a fee for late payment? Alternatively, you may want to make early or larger payments if you suddenly have access to surplus money – if the lender will allow you to pay off the loan early, will there be any penalties or exit fees? If your business needs to meet seasonal demand or you need funds while you wait for your debtors to pay you, then a flex loan may suit your needs better.

Lender’s Reputation

Just like a lender checking into your eligibility for a loan, you too should check the eligibility of the lender to ensure that you are not falling foul of a loan shark. Longevity in the marketplace is a good indicator of an established and experienced lender, and a trustworthy company will always be willing to answer any questions that you have. Read the reviews on their website and on social media pages to see what other people say about their experience with them.

Post-approval

Once you have been accepted for your loan, there may be more to do before you can start using the funds. Make sure that you stick to any spending limitations set out in your loan agreement. If you default on the loan, you may 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 in the future.

Final Thoughts

Even though it is not a good idea to take a loan out that you know you will not be able to repay, refusing to consider a loan may hold your business back. Funding can be used to help you to expand and grow your business, fill in the gaps between cash flow, or manage an emergency. By doing your research on the various lenders and their terms, you will be able to find the right loan that meets the needs of your business without putting the future of your business at risk.