Business loans are one method you can use to purchase a business or fund the ongoing operations of your current business. However, it’s not the only option and it is important to weigh up if you think a business loan is right for your financial needs.
Here are five things to consider before taking on a new business loan.
Determine the purpose of the loan
The first step is to clearly define the purpose of the loan. Identify what specific business needs you intend to use the fund for.
Whether it's acquiring another business, purchasing equipment, covering working capital requirements, or bridging a short-term cash shortfall, understanding your needs will help you explore a wider range of appropriate funding options.
It’s also worth examining other types of finance that might be available to you such as invoice financing, asset loans or equipment finance.
Assess your credit history
Your personal and business credit history plays an important role in determining your eligibility for a loan. Before applying for a loan, take a close look at your credit score and credit history. If you have a less-than-ideal credit rating, it's essential to work on improving it before proceeding with your loan application.
Start by assessing your current debts and make sure you are paying them on time. Credit reporting bodies can provide you with access to your credit information, allowing you to assess your creditworthiness.
Evaluate your business's repayment capacity
Before finalising the loan amount, it’s critical to assess your business's capacity to repay the loan. Carefully calculate the amount that your business can comfortably afford to service on a monthly basis. Keep in mind that larger loan amounts translate into higher monthly payments. It is crucial to strike a balance between the loan amount and your business's ability to handle the associated financial commitments. You also need to factor in your ability to pay if your business experiences seasonal ups and downs.
Prepare a business plan
A solid business plan is the first step you should take when seeking out a business loan. Lenders want to make sure that your business has a viable and sustainable plan for growth and profitability.
Your business plan should outline your goals, strategies, financial projections and demonstrate a clear repayment plan for the loan. Having a well-structured business model gives the lender confidence, increasing the likelihood of securing funding.
Examine the fine print
Before signing any loan agreement, it is vital to read and understand the fine print. Pay close attention to the terms and conditions of the loan, including interest rates, late payment fees, grace periods and early repayment penalties.
Understanding the consequences of missed payments or financial challenges will help you avoid unexpected complications in the future. If you have any doubts or concerns, seek legal advice to ensure you are fully aware of the contractual obligations.
When looking for a business loan, it’s important that you assess your situation and know what your options look like. If you’re not sure where you stand, it’s best to speak to a finance broker who can examine your business requirements and compare your options.
