Have you heard of the old adage saying “you have to spend money to make money”? Well, it’s true.
7 Factors to Consider When Choosing a Business Loan
Whether you’re planning to start a new business or upgrade your current system, you’ll need funding.
In the absence of a reliable source of financing at your disposal, any good idea that you have for your business won’t matter. You have nothing to start with.
That’s why along with your business proposal or improvement plan, you should also figure out where to get your financing.
Despite the many types of business loans available, a business financing option can fall only into one of two categories: it’s either equity or debt financing.
With equity financing, you don’t need to pay back in the future, but you sell partial ownership of your business.
As a consequence, you may lose some control of your business and a portion of your profits. In debt financing, you borrow an amount and pay it back with interest over time.
When looking for a business loan, you shouldn’t focus only on the interest rates. Here are other factors you should also consider when choosing a business loan.
1. Loan Size
The amount you need and what the lender offers are two different but related factors to consider.
First, you should know how much you actually need, including fees. This will be a significant factor in choosing a business loan because not all lenders or business financing options can provide you with the amount you require.
When you know the amount you need, you can easily check on which option can give you that amount.
2. Loan Repayment Terms
Before you take out a loan, make sure you know how long the financing arrangement will last.
Loans with shorter terms can require higher periodic payments, whilst longer loans can accumulate a higher interest amount over time.
You should also consider how often you need to pay and how much you should pay.
Additionally, you should be aware of how flexible lenders can be with your payment schedule. In case you’re struggling to make ends meet, will they be willing to give you extra time to pay?
Or will you suffer from a huge fee for any late payments?
On the other hand, if you suddenly get enough money to pay off your loan all at once, will they allow you to leave the deal early? Or will they ask for exit fees or give you penalties?
3. Interest and Fee Structures
This is probably one of the first things you thought about when you looked for business financing options. Interest rates determine how much you will actually pay for your loan. Lower rates are definitely preferred.
Nevertheless, you should take note that the interest you’ll get from a lender will depend on several factors like the kind of loan you’re getting and your credit history.
If you want a competitive interest rate, it’s good to compare multiple quotations from potential lenders before deciding on one.
You can also check out Mango Credit Reviews. Mango Credit interest rates and fees are provided with full transparency so there are no surprises.
4. Application Requirements
Sometimes it’s more than a good credit score. Different lenders may need varying requirements.
Some of them will do a financial and criminal background check, whilst others may ask about your debt-to-equity ratio.
If you take out your loan from banks, they may also require certain insurance policies for their protection.
5. Lender’s Reputation
This is important when you’re finding a lender for your loan.
You shouldn’t fall into the trap of loan sharks. If lenders look into your eligibility before approving your loan, then you must do the same.
Before you put your signature on the dotted line, make sure you know who you are dealing with.
Credible lenders can be trusted. They will give you all the information you need to know about your loan. If you have never heard of your potential lender before, you can easily search them up.
Check their profile and see what other people are saying about them. If there’s none, you should look for an established and experienced lender instead.
You can tell whether they are experienced or not by the number of years they have been in the business.
6. Credit Score
A good credit score is important because it allows you to access many savings and benefits, including loans with the most favorable terms. For many lending institutions, your credit score matters.
The higher your credit score is, the greater your chances are to acquire a loan. This is because a higher score increases a lender’s confidence that you can pay on time.
It determines whether you get the loan or not, how much rate you will pay, and the kind of financial options you’ll have.
7. Business Assets and Status
You should not only know where to get financing. You should also consider your capacity to pay for it.
Before signing up for a loan form, try to determine how your business would be doing when payment time comes.
Depending on how much profit you think you’d make within a certain period, you should decide on how much loan you should get.
Don’t take out any loan that you can’t pay. It will only lead you to a higher debt amount as interest increases every time you won’t be able to pay.
Moreover, your company’s assets and growth potential can also play a part in obtaining financing.
Assets can act as collateral for lenders. If you can’t pay the loan back, your lender will liquidate your company’s assets for payment. Meanwhile, your growth potential can attract potential investors.
Whilst taking a business loan as a business financing option can be daunting, especially if you’re a new business owner, it can help you grow your business.
You can use the money to expand your business, offset inventory costs and fill in your cash flow gaps. Also, it can be used to manage the cost of repair or replacement of equipment.
However, when taking out a loan, it’s important that you know what fits your business needs. By considering these factors, you’re protecting your business.
You would know what you’re getting your business into and you can assess whether you can afford a loan or a certain financing option.