A business loan is simply the money borrowed from an individual or an organization. This debt incurred will be paid back with interest and some sort of collateral is usually needed in some cases.
Are you a business owner considering taking a loan? Perhaps, you need the money for expanding your business, launching your new business, or helping your business stay afloat. Although, getting a loan might be a good idea, however, the following factors must be considered before applying for such a loan.
Why do you need a loan?
This is the first question that you need to answer. Most people apply for loans without having credible answers to this question. Having a sincere and genuine answer to why exactly a loan is needed is very important.
Before taking a business loan, there must be a strong plan mapped out as to how the funds will be used and how the repayment is made. If your reason for taking a loan is for expansion purposes, then you should also have a plan to accelerate how your business’s revenue would increase.
Sometimes, startups shouldn’t start their business journey with a loan as this can become an object of pressure quickly. However, a confident entrepreneur who has great plans especially in building brand awareness and providing quality services or products should not shy away from applying for loans.
How good is your credit score?
A credit score is a numerical representation of how likely it is to pay one’s bills or debt. A credit score affects one’s accessibility to loans or credit cards. Business owners can have a different credit score from the business itself i.e., a business owner has his or her credit score and the organization itself has its credit score.
Credit score ranges from 300-850. A credit score from 629 and below is bad for business. 630-689 is fairly good while a good credit score falls in between 690-719. The best credit scores fall in between 720-850, they are excellent credit and provide access to excellent funding opportunities.
How credible is your credit history?
This is similar to a credit score. They both work hand in hand. Credit history is the record of how much credit one has incurred in the past. It shows the debt records from credit companies, banks, the government, etc.
How much Income will be made?
Personally, how much income are you making? Business-wise, how much income is the company generating? If the company is not generating any income as of now then what are the final projections?
All these have to be mapped out in a business plan. The financial analysis should be carefully and honestly projected. The financial analysis should be done without any form of con activity to receive a larger amount of loans which can later become a problem when the company fails to meet up.
How much monthly expenses?
This is very key as well. Often overlooked while considering a loan application by individuals and organizations. People often get carried away by income and the projected income and this is a negligent thing to do.
For instance, a company income or projected income is $20,000 per month, if it turns out that such company expands about $15,000 per month to make that income. Then it would be a very foolish decision to borrow money that would require more than $5000 monthly repayment
This is a certain percentage that a borrower pays as a result of taking a loan. It is the lender’s profit. Interest rates are highly sensitive terms of a loan application that can determine the ease of the loan repayment.
Taking a loan with high-interest rates would take longer or require higher monthly, weekly or annual payments than loans with lower rates. For instance, a loan of $100,000 with a 5% interest rate would require a monthly payment of $8750 for it to be completely repaid in a year. The same borrowed funds with a 10% interest rate would require about $9,167 monthly payment for it to be paid back in a year.
In the scenario painted above, the loan with a 10% interest rate can also be completed with a monthly payment of $8750. However, it would take more than 12months.
Getting the perfect interest rate that suits the business is very important. Monthly repayment of money borrowed is not a child’s play thus a person must consider his options carefully.
It does not matter if one is a regular or a newbie at taking loans from banks, the government, and other financial institutions. What matters is understanding the key elements before the application and approval of such loans.
It is important to check if the interest rate, mode of repayment, flexibility, or ease of payment fit with the organization’s plans and capacity. Also, getting familiar with the terms and conditions of the loan contract is very important.