You’ve most likely heard the old adage saying “you have to spend money to make money.” Whether you’re planning to start a new business or upgrade your current system, you’ll most likely need additional funding at some stage.
7 Factors to Consider When Choosing a Business Loan
It’s wise to consider your funding options in line with your business and growth planning. Ideally, this should be done in collaboration with an accountant.
There are many different requirements for a business loan. Common scenarios include needing a cash injection to facilitate business expansion. This includes directing funds to hire new staff, renovating or expanding into a new premise, or purchasing equipment.
A business loan is also often used to purchase inventory (in particular, to get bulk stock discounts) – especially when businesses have seasonal demands. Business loans also offset regular cash flow fluctuations, including slow-paying customers.
Here are several areas to be across when considering a business loan.
1. Interest and Fee Structures
For most people, interest rates and fee structures are the starting point when assessing options. The interest rate charged will be based on many variables, including the amount of money you’re seeking, the duration of the loan, how long your business has been trading for, your businesses turnaround, and whether it’s a secured or unsecured loan, to name a few.
With a secured loan, the lender requires an asset (typically a property) to ‘back’ the loan. Conversely, an unsecured loan does not require an asset as security to obtain the loan. Typically, an unsecured loan will attract a higher interest rate as this loan type is deemed riskier to the lender.
2. Loan Size
It’s prudent to distinguish between the loan size you’d like versus what you need, making sure you also factor in fees.
Similarly to rates, the amount required, your time in trading, and business credit history will affect which financial institution is prepared to lend you the money and on what terms.
There are lots of options to obtain finance, including traditional lenders, such as banks or building societies, or alternatively specialist lenders, including fintechs and private lenders.
3. Loan Repayment Terms
A loan’s repayment terms are essential to assess. This includes the duration of the loan (how long the loan goes for) and its repayment structure.
In addition, get clarity on whether there is a fee for any late payments. On the other hand, if you suddenly get enough money to pay off your loan all at once, will the lender allow you to leave the deal early?
Or will they ask for exit fees or give you penalties?
4. Application Requirements
Application requirements vary substantially from lender to lender. Some lenders will do a thorough financial background check to determine your debt-to-equity ratio (meaning what assets you have versus your liabilities (i.e. debt)) before offering a loan.
Usually, more traditional financial institutions like the banks, will require fairly substantial levels of documentation in their application process.
Conversely fintechs and private lenders are renowned for requiring minimal paperwork.
5. Lender’s Reputation
It’s important to consider the lender’s reputation when researching a loan to avoid what’s known as ‘loan sharks’ – meaning an organization or individual that loans money at extremely high-interest rates, with often unforgiving late payment terms.
A reputable lender will be transparent about all aspects of the loan, including interest rate, fees, payment schedule, the application process, late payments, early payments, and so forth. Check out Mango Credit Reviews to see what their clients have to say about this specialist lender.
6. Credit Score
A business’ credit score is a numerical representation of the creditworthiness of a borrower. It’s also directly aligned with credit history (i.e. whether you’ve made previous loan payments on time or if you’ve missed or been late on payments).
In general terms, the higher your credit score is, the greater your chances are to acquire a loan at favourable rates.
This is because a higher score increases a lender’s confidence that you can pay on time. It also determines whether you get the loan or not, how much rate you will pay, and the kind of financial options you’ll have.
Traditional lenders, such as banks, usually require a high credit score to be eligible for their products. Specialist lenders, including fintechs and private lenders, are usually more flexible about their lending criteria and credit score prioritisation.
Some lenders don’t do a credit check, like short-term lender, Mango Credit.
7. Capacity to Repay the Loan
Most businesses focus on the source of funding. What’s arguably more important is the capacity to repay the loan.
This is also known as ‘loan serviceability.’ Independently of the loan size, and type, it’s critical to ensure that you have the means to repay the loan within the agreed loan period.
Work out the sales and profit the business needs to achieve to consistently repay the loan on time – keeping in mind that life doesn’t always go to plan, so it’s wise to have a buffer. It’s preferable to assess this in conjunction with an accountant.