What to Consider Before Acquiring a Business Loan
The options for small business financing have increased considerably. Beyond going to the bank for a traditional small business loan, you now have a range of alternative lending products that can help a small business meet its funding needs.
While this has made it easier for small businesses to get the capital they need, it has made the process of finding the right loan a little more confusing. There is no one-size-fits-all lending solution that is the best option for every business under every circumstance. To make sure you are getting the right small business loan to fit your needs, you are going to have to consider several points.
By asking yourself the following questions, you can get a better idea of which lending options will work best for your business.
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Why does my business need a loan?
The answer to this question might seem obvious, but you want to go beyond the surface level. When you know why you need a loan, it can help you to answer other questions that will make it easier to find the right financing option.
One important question this can answer is whether you need a short-term or long-term loan. As an example, if you need to replace an expensive piece of equipment, it might take longer to realize the return on investment, so you are probably better off going with a lending option with a longer term.
On the other hand, it could be a business that wants to buy extra inventory it expects to sell quickly. If this is the case, it makes more sense to look for a short-term loan. Even if the shorter term comes with higher payments and interest, the total cost will usually be lower because the capital is paid back in less time.
How much money does my business need?
When you know the purpose of the loan, you should have a good idea of how much you need to borrow. According to one prominent lending marketplace, many small business owners enter the process with the intention of borrowing as much as they can. While it might seem logical to get as much funding as you can, there are downsides that come with borrowing too much.
A loan is not free money. You need to have a plan for how you are going to turn the capital into value for your business and to pay the money back. Furthermore, every dollar you borrow is going to increase the cost of the loan. If it is not a part of the plan, you are adding to the expense without adding any value.
Knowing the amount you need to borrow can also help you find the right lending product. Banks typically want to deal with high-value loans. If your capital needs are relatively small, most banks won’t find it worth the administrative costs that go into the process. Microloans and other alternative lending solutions could be a good resource for these borrowers.
How long can I wait?
It is important to know how quickly you need the money. Some funding needs have no hard timeline, but there are situations where a business might need money quickly. As an example, maybe you signed a contract with a customer and need capital to buy supplies.
In a situation like this, a business might not be able to wait for the long approval process that is typical of getting a loan from a bank. Fortunately, some lenders specialize in loans that require fast approval and a quick release of the funds. It might cost a little more than borrowing from a bank, but it is worth it if your business needs money in a hurry.
Monitoring and forecasting your business’ cash flow is also essential for identifying and preventing financial pain points before they arrive. You can even do that in automated ways with the ForwardAI cash flow forecasting software.
How does your business credit profile look?
Both your personal credit history and the credit profile of your business can have an impact on the lending options that will be available and the cost of the loan. Before applying for a loan, you should check your personal and your business credit score.
Lenders are likely to use credit information from your business and your personal life when determining the creditworthiness of your business. If you haven’t started already, you should be monitoring both credit scores and working to improve them.
With these questions answered, you will be better equipped to assess different lending products. Take the time to look at the range of options that are available and use this information to find a loan that meets your needs and makes sense for your business.