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When you need funding for your business, it can be very tempting to go for the first business loan on offer. However, there are several things you should look for before you sign on the dotted line.
1. The right type of loan
As with personal finance, there are many different forms of business loans, so you need to choose the one that best suits your business needs.
- Traditional loans: This is the business equivalent of a personal loan, which can be secured or unsecured. You borrow a fixed amount and have a fixed payment schedule with a fixed interest rate.
- Line of credit: A line of credit gives you a fixed amount of funding but you don’t have to accept and pay interest on the full amount. You can call on the funds when you need them and you only pay interest on the amounts you borrow.
- Equipment finance: If you need funding to purchase equipment, this type of business loan is designed to fit your needs. The piece of equipment you buy will serve as collateral for the loan, so you can often access more flexible terms.
- SBA loans: SBA or Small Business Administration loans are an option if you have trouble qualifying for a bank business loan. The lending criteria are more flexible, making it a more suitable choice for new businesses.
Before you agree to a business loan offer, it is worth checking other types of business lending to confirm that the loan is the most suitable for your business.
2. Manageable debt repayments
Before you sign the loan contract, you should have the opportunity to check the details of the loan repayment requirements. You should carefully consider whether you can comfortably accommodate the monthly payment in your budget, not only now but throughout the life of the loan.
If you have concerns that the payments will be difficult, or you may have difficulty meeting payment deadlines, it is best to look for another loan product. Missing or late payments not only create more financial stress but can have a significant impact on your credit.
Related: The 7 Different Loans You Can Get as a Business Owner
3. Reasonable loan rates
This follows on from the previous point, but you also need to fully understand what fees you will incur with your new business loan. In addition to paying interest, you may incur an origination fee, and a processing fee. This will be added to your loan principal or you will have to pay it in advance. Ideally, your new business loan will have little or no such fee.
You also need to keep an eye on the fees that you may incur over the life of the loan. For example, you don’t want to be hurt by a large fee later if there is a bank mix-up. It’s also a good idea to look into early payment fees. If your business finances change and you want to clear the debt, you don’t want a loan that imposes a large early payment fee.
4. A good reputation of the lender
Unfortunately, not all lenders in the market offer the same level of service, in fact, some can be very risky. The saying “too good to be true” definitely applies here. So, it’s important to investigate the lender’s reputation and watch out for some red flags. These include:
- No credit check required: If a lender has minimum credit score requirements or does not require a check of your credit score through soft or hard pull inquiries.
- No credentials can be verified: If the lender does not have a professional website and does not provide physical address details.
- Lack of payment transparency: Lenders should be very clear about their loan payment structure, so you are fully aware of how much the financing options will cost.
- Selling pressure: If the sales rep is trying to pressure you to immediately accept a business loan offer without presenting you with the information and time to study it.
5. The right amount of debt
While it may be tempting to get the biggest business loan you can get approved for, it’s not a good idea. Likewise, if the loan offer does not cover your immediate funding needs, it is not the right choice.
Think carefully about what funds you need and how you will use them, so you can be sure to get a loan for the right amount.
6. An attractive interest rate
As with any form of finance, your interest rate will determine the cost of your business loan. Lenders use different criteria to determine your risk profile and therefore your rate. However, these criteria vary from lender to lender, with some lenders being more strict and some lenders being more lenient.
If you have a new business, you won’t get the best rates, unless you have good credit yourself. However, it is still important to compare rates to ensure you get the lowest possible rate for your business.
However, you may be willing to pay a slightly higher interest rate if there are lower down payments or other loan benefits. So, don’t look at interest rate comparisons without context.
Related: 3 Different Types of Business Investments and What Entrepreneurs Need to Know
7. A reasonable funding period
While you may not need the funds immediately, you probably want to implement your plans as soon as possible. So, check the financing hours offered by each lender for their business loans. After you submit your application and receive approval, when can you expect to receive the funds in your bank account?
Some lenders can release funds within 24 hours or just a few days, but other lenders are slower. If you have to wait weeks or months for your funds, it’s a good idea to look at alternative options.
8. Solid customer support
Finally, it’s worth checking the level of customer support your potential lender offers. If you have questions or queries about your loan, can you speak to the support team immediately? Some lenders have telephone helplines, while others rely only on email or chat. Therefore, you should be comfortable with the customer support options.
It’s a good idea to read some lender reviews to see if there are any red flags about long call wait times, slow responses to emails or other customer support issues before you go. become a customer.
Getting the right business loan for your needs requires some time to compare different aspects and lenders. If you follow the above factors and make sure to maximize each of them, you will save money, time and financial stress.