Loans can be helpful for companies in all sorts of ways, particularly if your business is relatively new. There are different types of loans available for companies to apply for, dependent on the amount of business finance you require and how you want to spend it.
Evaluating all the pros and cons of the different types of loans and ensuring you fully understand the conditions involved with the payments, can be a challenging job. Therefore, in this article, we look at some of the main things you must consider before signing on the dotted line of a loan agreement.
Purpose of your loan
Be clear why you want to take a loan and what you want to achieve with it. In many cases, people are swayed by the fact that it will bring more money and increase business finance, but without a clear plan for how you will invest it, you may not make the best use of it in the long run. Consider all the factors that may be involved such as the size of your business, current investment and the available opportunities. Once you are clear of the purpose, then it becomes a lot easier to apply for a business loan.
Consider all options
More than 30% of all businesses have increased their business finances by taking out a bank loan. There are many options available today, with banks and private investors willing to provide money to help you grow in hopes they will eventually make a profit themselves. Some offer fixed rate interest while others have variable interest rates. Various conditions will be set depending on whether it is a secured or unsecured loan, and the costs involved. Therefore, carefully evaluate all the lenders and all the options before coming to a decision. You don’t want to regret your choices later on.
Decide how much you need
You won’t be able to apply for a business loan unless you know how much money you want. If it’s about buying a particular entity, then you will have a clear idea how much you want to ask for, but if it is about running a project or to cover a shortfall, then you will need to carefully evaluate all the various costs before coming up with a definite figure. Do the maths on how much you are willing and able to make in repayments and over what length of time.
What type of loan you require
There are two different types of loans available. They are known as secured and unsecured. With a secured loan you must offer an asset such as property or land as a form of guarantee to get the loan which will result in the loan interest rate being lower than usual. However, with a secured loan, if you can’t pay the loan back in full, the lender will take control of the guarantee so you must be sure you will be able to fully repay. An unsecured loan on the other hand, does not require you to risk any of your assets, but the interest rate will be higher than with a secured loan.
The bank usually provides you with two different options for interest rates known as ‘fixed’ and ‘variable’ interest rates. If you can pay for a longer time and are sure of your success, then you can take a variable interest rate which may rise or fall over time, in line with the current rate of interest. If you want a secure rate however, then go for a fixed rate as it provides confidence with payments.
Make a plan
Go back to the drawing board and map out how you will manage things once you have the extra business finance. There will be new monthly repayments to factor in, so you need to plan how you will ensure you can meet those obligations. Your business plan should give you a good idea of your expenses, as well as your projected future profits based on your new investment. It may not be a hundred percent accurate but will give you a general idea of how you are going to manage things and if it’s all worth it.
Check your credit report
Go through your credit history to get an idea where you stand in terms of payments and money matters. Any lenders will also be looking at the credit report to see if you are suitable for a new loan and if they are able to trust you to make the repayments. Make sure you have good payment history when it comes to repaying any previous loans and remove any errors that exist so that your application for a loan does not face any obstacles.
Understand the personal guarantee
No bank will give you any money unless you have something as collateral. You should not offer up anything as collateral without serious contemplation because if you are unable to pay back the loan or if a particular condition is not met, your valuable assets can be at risk. In the contract, it’s clearly stated that the loan provider can seize your property if you fail to comply therefore make sure you have the resources required to act as back up.
Read the terms and conditions
You may get the go ahead for your loan which is great news, but have you checked out the small print? In many cases, banks or investors agree to loans but may only agree to make payments in increments. There will be some money upfront, but after that, you can only get the next instalment on a fixed date or once a specific stipulation is met. Be wary of the penalties that may apply if you are unable make a repayment on time or complete the designated work. There are several other conditions often imposed that you may miss; therefore, read all the documents carefully.
Talk to someone with experience
If you are unsure about anything or cannot wrap your head around a particular condition, then consult someone who has done it before. A friend or family member who has previously applied for a loan can be a good option but if it’s something legal then consult a loan expert, so you can access proper guidance before you sign the documents.
In conclusion, there are many things to consider before making a final decision, and that can be a daunting task. But the points mentioned above will help in making the right choice as long as you know the requirements of your business and the aim of your investment.