How to choose a business loan: 5 factors to consider
Many business owners make the error of focusing entirely on the interest rate when looking for a business loan, neglecting other important considerations.
Even though it’s crucial to consider interest rates when selecting a business loan, they don’t tell the whole story. For the sake of a few percentage points on an interest rate, you should be mindful of giving up too much control and freedom. Otherwise, any kind of setback could put your company at risk, along with any assets you put up as collateral to get that reduced rate.
Shop around to understand what’s available
Various banks provide various loan products. In the small print, important distinctions are frequently lost. Keep an eye out for the following details.
- What kinds of loans are available from various banks?
- What regulations and practices apply to loan authorization? Who is going to approve your loan?
- Are there account managers with a focus on your kind of loan or business loan? These people occasionally have a higher appreciation and understanding of your company.
- Are you able to negotiate with your account manager? Could you, for instance, obtain lesser costs and more latitude in terms of repayment?
Don’t just believe what a bank says. Make use of your business loan relationships in your network. Inquire from them regarding their experience working with a specific bank, the level of service they received, any issues they had, what was and wasn’t negotiable, and what the bank was looking for in a loan request.
You should think about the next five aspects before choosing a loan.
1, Loan term
How long is the lender willing to extend the loan term?
Longer periods result in greater borrowing costs, but you might wish to incur that cost to prevent cash flow issues.
2. Loan size
What portion of the project’s cost can your lender finance?
It will be determined by this whether you should diversify your lending relationship with a second bank and how much of an investment you should make.
3. Flexibility
What repayment flexibility does the lender offer?
As a business person, you are aware that unexpected events can cause even the finest plans to fail. It’s critical to be open and honest with your banker about what might transpire if you were unable to make your scheduled loan installments. Would your bank, for instance, permit you to temporarily cease principal payments? It’s crucial to learn this in advance rather than in the middle of a problem.
5. Collateral
What assurances are required of you in the event of default? The bank may file a lawsuit to get the right to sell the collateral if you are in arrears on your loan. Because everyone loses, this is always a final option.
Accounts receivable, pledges and liens (on machinery and other fixed assets), inventories, real estate, personal guarantees, and third-party guarantees are all examples of collateral. The kind of collateral you supply is determined by the nature of your business loan, the bank’s terms and conditions, and the negotiating power you have.
You should be aware of the assets that you could lose in the event of a default. This risk might also affect your personal assets in addition to your business loan.
6. Financial reporting and covenants
What financial and reporting requirements does the bank demand? The majority of loan agreements have financial reporting requirements that call for submitting annual financial statements and reports to the bank. Typically, less stringent reporting requirements apply to smaller loans.
A covenant is an arrangement in which the borrower accepts a number of terms in order to obtain a loan from the bank. If a covenant is broken, the loan’s conditions are breached, and the bank may request a repayment of the entire amount. For instance, as part of a covenant, you might agree to refrain from taking out more loans or to keep a particular financial ratio at a particular level.
Protecting your everyday cash
It’s crucial to bargaining for a loan that meets both your needs and those of your business loan. You should carefully examine whether to borrow, how much to borrow, and how quickly you want to pay back your loan in order to avoid making a mistake.
Numerous of these factors have to do with preserving your business loan’ working capital so that you may keep financing your business loan’ ongoing operations. Download a free copy of our manual for additional advice. A Guide to Writing a Successful Loan Request for a Business Loan.
Most likely, you’ve looked at your possibilities for business loans. Perhaps there are even one or two offers in front of you. But how can you tell if a loan offer for a business loan is the appropriate one for you? Here are four considerations to make while assessing a loan offer.
The total repayment amount is a sum of money that represents the loan’s principal plus all associated expenses (including interest, origination fees, credit reporting fees, application costs, etc.).
Most individuals find this measure to be much simpler to understand than APR (annual percentage rate). The majority of borrowers actually prefer to see the entire payback amount over other metrics of the loan cost, according to a Lendio survey.
This is an illustration of ultimate payback: You are presented with a $1,000 loan offer with a three-year, 10% APR and $150 in finance charges. If you borrow $1,000 and repay it using those terms over the course of the three-year term in monthly installments, your overall repayment amount will be $1,335.86.
You can assess whether the cost of a loan actually fits the budget of your company by knowing the total amount that will need to be repaid. Before you apply, you can see precisely what you’ll be paying thanks to Square Loans, which makes the entire amount you return and the cost of the loan both transparent.
You might be curious as to how the overall repayment amount and APR varies.
The annual percentage rate, or APR, is the average cost of borrowing money over the course of a loan. APR is a percentage that expresses interest rates and any other financing fees, making it more challenging to comprehend. The APR is 19.9 percent if you apply the identical three-year loan example from previously ($1,000 loan at 10% annual interest for three years, plus $150 in financing fees).
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