It is one of the realities of small business and one of the most difficult decisions an owner will face: taking out a loan. Whether you’re aiming to grow your company or just keep afloat, a small business loan is an essential tool in the businessman’s toolbox. Generally, some form of collateral will be required to secure the loan, and these come in the form of your business’ assets, such as real estate, equipment, etc. Needless to say, there’s a lot at stake.
So here are five factors to keep in mind when considering taking a small business loan.
1. Determine how much funding you require
Once you’ve decided that you do, in fact, need a loan, it’s important to be realistic about how much you need. Remember to include fees in the equation. You don’t want to go through this process multiple times, so make sure you’re asking for enough money to make accomplish your goal. At the same time, be cautious of taking out a larger loan than you need, as the interest will be costly and it doesn’t help your income-to-debt ratio.
Also, bear in mind that some lenders may be unable to provide the amount of funding you require, so do your homework first.
2. Decide how fast you need the small business loan
The less urgent your need, as with most things in life, the better your options will be. If you have time before you require the loan, you might be able to shore up your credit score, search around for an ideal lender or whittle down the amount you’ll need to borrow. If you think you might need one in the coming months, start preparing as if you absolutely will.
3. Know your credit score
Your credit score is going to be a primary factor in getting you a loan. It is imperative, therefore, to make sure your score doesn’t have any mistakes that need resolving. Before you even consider applying for a loan, request a copy of your credit report (you can obtain one for free at AnnualCreditReport.com) and check it to ensure its accuracy. If you think there is an error, contact the credit bureau and company involved immediately to resolve the matter.
A high credit score, above 700, provides you with the best opportunity for securing a low-interest loan. A mid-level score, above 600, will come with higher interest, and a sub-600 score will include high interest rates if the loan is even approved in the first place.
4. Shop around for alternatives to a small business loan
These days, there are a variety of sources from which to seek funding. Traditional institutions, such as banks and credit unions, have long provided a needed influx of cash to the small business owner. Shady knee-capping agencies also have a long tradition, however. Today, there are merchant cash advance options, as well as companies that specialize in more flexible repayment options, so again, do your homework before jumping right in.
5. Read the fine print
Before you sign on the dotted line, make sure you understand what you’re signing. Not all loans are boilerplate, there are a variety of options out there, so look closely at the terms of the deal. Be aware of the payment structure: Is there a balloon payment at a set date that you might not be prepared for? Is the interest going to amount to more than the principal over the life of the loan? Are there origination fees or early payment penalties? These and other factors should be thoroughly considered before taking on any debt.