If you’re a startup that needs the capital to turn your brilliant idea into a long-running business, looking for a loan to expand, it can be difficult to choose between the various business loans available in the market.
Many business owners stick to just looking for the lowest interest rates, under the assumption that this minimizes their liabilities. Some will be forced to look for loans with none or low collateral. But there are many options to consider!
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Business owners aren’t necessarily accountants or savvy with banks and non-bank lending. So, here are some tips to get you started on your way to finding the perfect business loan to build your business on.
What is a Loan?
A loan is any amount of money that’s given to you under the assumption that you will pay it back. If it’s from your dad, then it might be a zero-interest and indefinite term loan: you only pay what he gave you regardless of inflation, and he won’t take you to court if it takes you thirty years to pay it back.
On the other end of the spectrum, you might be taking a loan from a loan-shark who charges monthly interest.
Most people will stick to bank loans for their legitimate purposes and do their best to provide the collateral or assurances required by banks. There are actually a range of other legitimate options that can be taken if a bank loan isn’t suitable for you.
Things to Figure Out Before You Start Applying for a Business Loan
There are five things you should know before you even start looking at business loans! These questions will require you to take a hard and honest look at yourself and your own business, and it might be easier to do it
- How much loan do you need? Can you afford to sell equity or take on partners rather than a loan? What will it change in terms of your business? If you intend to furnish all your prospective costs through a loan, then how soon do you think you will break even?
- What is the term you’re looking at? Are you in a fast-moving business and you intend to pay off all your costs in a decade? Or are you in the sort of business where you keep on leveraging your credit until you’re retiring or selling off your business?
- What interest rate can you afford? A combination of the interest rate on your loan and the term of your loan will show you what the real cost of your loan is over the full loan period. You might then prefer not to apply for a business loan and look at other options.
- Do you have any collateral? Many business loans will require hard collateral, often machinery, or physical property that can be repossessed in case you cannot complete your payments. Even if you have collateral, are you willing to risk it?
- What is your creditworthiness? It’s easy nowadays to get free or low-cost credit reports! Your bank or non-banking finance organization will check your credit score before offering you the loan. Frequently, a slightly low credit report will lead to a higher interest rate. You can wait and ask experts on how to improve your creditworthiness, so check your credit report before you apply.
Tips for Choosing the Right Business Loans
When you’re identifying business loans, what aspects should you look at before you apply for the business loan?
You should definitely do a comparative study on a number of points before finally making the right choice.
Tip 1: EMI Calculations
Check what your EMI will actually be per month or per year, and what it adds up to over the full term of the loan. For unsecured loans, the interest rate is typically higher (to make up for the higher risk faced by the lender), and the EMIs are correspondingly higher.
Tip 2: Bow to Expertise
This is probably the first business loan you are applying for, and it’s also probable that it won’t be the last. But there are accountants, lawyers, and business management experts who have done this for a hundred other businesses and can spot pitfalls you wouldn’t know until five years later. It is a worthwhile investment to ask an expert.
Tip 3: Repayment Schedules & Terms and Conditions
Check your ability to pay your business loan back early without a fine, to change your repayment schedule and find out whether your EMI will be unsustainable over the long term.
Tip 4: Flexibility
Look at options such as equipment financing or cash advances for shipments. These are also broadly in the business loans category but are not always clear to businesspeople who have not had previous experience with getting financing.
Tip 5: Lender Check
Even if you’re applying for a large national bank and you feel that you’re already sure about your lender, you should always check their past performance in the business loan category. For non-bank options or small lenders, and so on, this verification becomes even more important. If you have an agent or broker, ensure that they are also trustworthy.
Tip 6: Paperwork
Ensure that your business’ paperwork is absolutely clear. There should be no doubts about any of the licences, previous accounts, rental accounts or ownership of buildings or equipment, etc. If your paperwork isn’t absolutely clear, then your business loan will inevitably be delayed.
Lines of Credit and Other Options
Along with applying for a business loan, from banks or otherwise, you can also consider credit options. In many cases, what a business needs is not a singular large loan but the ability to support itself when the liquid funds are not available. In this case, a business credit card can be a suitable option.
For business people who are aware of the option but prefer to use business loans, these are the things you should keep in mind while doing your research before you apply for a business loan.