3 Things to Know When Taking a Business Loan

If you own a small business, sooner or later you will probably need to take out a business loan. Financing a business can be complicated and there are many important questions that one needs to answer. Also, there are SBA loans, from the Small Business Administration, conventional bank loans, online working capital loans, and even peer to peer loans to choose from. With that backdrop, let’s take a look at three things that you need to be aware of when taking out a business loan.

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Be Selective As To Where You Apply

When you are starting out in the financing process, it may seem tempting to apply for as many loans as possible, but keep in mind, that this will affect your credit score, and of course, will make it harder for you to qualify for the loan that you need. Remember, every time you apply for a business loan, the lender will check your credit. Sometimes it’s a soft credit pull, sometimes it is a hard pull.

The best thing you can do is understand what the criteria are to get qualified for each lender. At that point, you can apply for just a few loans, and select the one that you are most comfortable with. You begin by understanding where you are most likely to get financed, and then look among those lenders. This can save your personal and business credits some unnecessary damage in the process. The “shotgun approach” isn’t going to help you as several different dings on your credit will add up in the end. It shows your creditors that perhaps you are becoming desperate, something that they don’t want to be bothered with.

Understand All Costs Involved

It is vital to understand all of the costs involved in borrowing from the lender. One of the most important costs that you will run into is the Annual Percentage Rate of the loan, as the APR will dictate much of how much your monthly payment will be. In general, most loans from the SBA or a traditional bank will be between 6 and 9%, while some of the less traditional lenders may ask for much more. Keep in mind that the APR can be a bit higher for short-term loans, but in the end, you are paying much less in the way of interest on a 1-year loan than you are a 20 year loan.

Beyond that, be cautious about prepayment penalties. Unfortunately, some lenders throw this into the loan package, punishing you for getting out of debt quicker. The lender will often have a sliding scale that is more expensive the sooner you pay off the loan. Because of this, you should make sure that you read through all of the fine print and understand how expensive this loan could get if you suddenly pay it off. The last thing you need is a surprise “tax” on your business for doing what should essentially be thought of as the “right thing.”

Line of Credit or a Traditional Loan?

At times, a business line of credit might be better than a traditional loan. A loan, of course, is a fixed amount of money that you pay back with interest over a specific amount of time. On the other hand, a line of credit is much like a credit card. You get approved for the maximum amount of money that you are allowed to borrow, and you repay it over time. The big advantage to having a line of credit over a traditional loan is that you only have to pay interest on funds you use.

The reason a line of credit is typically better than a loan is that if you occasionally find yourself short on working capital to buy inventory, or to cover a short-term expense, the line of credit gives you the flexibility and the peace of mind needed to move forward. It also is an excellent way to cover unexpected expenses, something that most business owners are far too aware are possible. However, keep in mind that lenders will demand some type of collateral, so realize that this isn’t a risk-free proposition.

In Conclusion

Business loans are an excellent way to finance your small business, but there are a few questions that you need to ask yourself. Depending on the size of the business and the starting capital needed, you may or may not find yourself asking some of these questions. That being said, most new businesses will need to put up collateral in case they fail, which can include land, real estate, and many other assets that the individual owns. It’s just like any other loan; your personal assets could be at stake if you don’t pay back the money borrowed. Once you are established, some loans can be backed by inventory or a general lien on your business assets. As a general rule, the longer you are in business, and of course the better credit the company has, the easier it will be to qualify for a business loan.

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