things to consider before taking up a business loan
There will come a period in every business owner’s life where you will require funding for growth or need to take out a business loan to navigate through tougher times. However, there are many things you need to consider to avoid taking up a bad loan.
As much as a loan can help you, applying for a commercial loan is a serious business and you don’t have to risk your house for a business funding. It shouldn’t be taken lightly as taking one out with unfavourable terms or borrowing too large an amount could leave you under financial stress – and nobody wants that.
If you’re wondering what you should consider before make a move to secure any type of loan, then here are things to check to make sure you reduce the risk of ending up distressed:
1. Set out what you need a commercial loan for and what potential options are available
Firstly you should determine what the purpose of the loan is. Are you looking to buy another business, more equipment, cover ongoing working capital or a short term cash shortfall? There are many business needs and thinking through these needs will help with identifying a wider range of appropriate funding options. In the event that traditional banks or non-bank lenders cannot provide a suitable solution, there are other avenues to consider. For example, angel investors will be able to provide direct funding, acquisition of a business partner, or application for special government grants can also be an alternative. Find out what are the options for small business loan.
2. Do you have a healthy credit history?
How does your personal and business credit history look? It’s important to bear this in mind as the health of your credit history determines your eligibility for a loan. If you have a bad credit score, it’s advisable to correct it before you begin the process of applying for a loan. Driving down existing debts is a good place to start. Equifax, Experian, and illion are credit reporting bodies you can contact to access the information on your credit rating.
3. Determine the amount your business can repay a month
Before you decide on the amount you would like to borrow, make sure you’ve done the calculations on how much you can afford and realistically pay per month. This amount should be a comfortable one that your business is able to service/repay. Remember, the bigger the loan amount the higher the monthly payments.
4. Have a strong business plan
Let’s face it, loans are a commitment so you need to be certain that your business plan will be able to make money to service and repay the loan commitments you have or take on. A business plan or model is something you may need to present to the potential lender or financial institution of choice. The more solid your business model is, the more confident they’ll be in providing you with funding. Need help to start? Check out this template.
5. Always read the fine print
This applies to anything that is a binding contract. You have to be absolutely careful with what you’re signing up for. You don’t want to be blindsided or caught up in a clause you weren’t expecting months into the arrangement. Things to look out for include: changes to the interest rates, late payment fees, grace periods, early repayment penalties, and most importantly what happens if you missed a payment or can’t afford to pay your debts.
6. Speak to someone in the know
It’s always a good idea to speak to someone who has taken out a loan to get a clearer understanding of what it entails. It may even be worth reaching out to your business mentors or investors for advice on what you should do in terms of funding. Hashing it out with someone familiar with you, your business, and what type of loan it will benefit from most is also a great way at helping you soothe your worries.
thinking about taking on a small business loan?
If you are looking for business funding, thornmoney may have the right solution! As a specialised business loan lender, we offer tailored funding options that can tackle your cashflow issues.
If you’re upgrading your fleet or business equipment, our asset finance products might be your answer. Our loans are available with tailored rates for your business and various payment terms up to 5 years. The options include chattel mortgages and rental agreements. Please refer to “What is asset finance?“ for more information.
Our business line of credit (also known as invoice finance) allows you to simply turn unpaid invoices into fast funds. In other words, with invoice finance, up to 90% of the invoice amount can be accessed as a ‘cash advance’. With no lock-in contract or fixed monthly fees, it is as simple as connecting your accounting software with our platform. To get more details about this funding option please read “What is invoice finance?“
Not sure which option to right for your business? Contact us now by clicking the button below!
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