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If you need funds for your business, it can be very tempting to take the first business loan on offer. However, there are a number of things you should pay attention to before you sign on the dotted line.
1. The right type of loan
As with personal finance, there are several different types of business loans, so you need to choose the one that best suits the needs of your business.
- Traditional loans: It is the business equivalent of a personal loan, which can be secured or unsecured. You will borrow a certain amount and have a certain repayment schedule with a fixed interest rate.
- Credit line: A line of credit allows you to finance a certain amount, but you do not have to receive and pay interest on the entire amount. You can call on the funds as much as you need and you will only pay interest on the amounts you borrow.
- Equipment financing: If you need funds to purchase equipment, this type of business loan is designed to fit your needs. Part of the equipment you buy will serve as collateral for the loan, so you can usually access more flexible terms.
- SBA loans: SBA loans or Small Business Administration loans are an option if you have a hard time qualifying for a bank business loan. Lending criteria are more flexible, which could be a more comfortable choice for new businesses.
Before agreeing to a business loan offer, it is worth evaluating other types of business loans to confirm that the loan is the best fit for your business.
2. Manageable loan repayments
Before you sign the loan agreement, you should have the opportunity to check the details of the loan repayment terms. You will need to think carefully about whether you can comfortably fit the monthly payment into your budget, not just now but throughout the life of the loan.
If you are concerned that the payments may be difficult or that you have trouble meeting the payment deadlines, it is best to look for another loan product. Missed or late payments can not only create additional financial stress, but can also have a huge impact on your credit score.
Related: 7 Different Loans You Can Get As A Business Owner
3. Reasonable loan fees
This builds on the previous point, but you should also be fully aware of the fees you will pay with a new business loan. In addition to interest payments, you may incur origination fees and processing fees. They will be added to your loan principal or you will have to pay them up front. Ideally, your new business loan will have little or no fees.
You also need to be aware of fees that may accrue over the life of the loan. For example, you don’t want to get stung by a hefty late fee if there’s a mix-up at the bank. It’s also a good idea to watch out for early repayment fees. If your business finances change and you want to pay off a loan, you won’t want a loan that imposes a hefty prepayment fee.
4. Good reputation of the lender
Unfortunately, not every lender on the market offers the same level of service, in fact, some can be downright risky. The saying “too good to be true” certainly applies here. So it’s vital to research a lender’s reputation and be on the lookout for some red flags. That includes:
- No credit check required: If the lender has minimum credit score requirements or does not require a soft or hard inquiry to verify your credit score.
- There are no verifiable credentials: If the lender does not have a professional website and does not provide physical address information.
- Lack of transparency of fees: Lenders should clearly know the loan fee structure so that you are fully aware of how much the financing options will cost.
- Selling under pressure: If the sales representative tries to pressure you into accepting a business loan offer right away without giving you the information and time to study it.
5. Exact loan amount
While it may be tempting to get the biggest business loan you can get approved for, it probably won’t be a good idea. Likewise, if the loan offer will not cover your current financing needs, it is not the right choice.
Think carefully about what funds you need and how you will use them to make sure you get the right amount of loan.
6. Attractive interest rate
As with any form of financing, your interest rate will determine the cost of your business loan. Lenders will use different criteria to determine your risk profile and therefore your rate. However, these criteria vary from lender to lender, with some lenders being stricter and some more flexible.
If you have a brand new business, you probably won’t get the best rates unless you have excellent credit yourself. But it’s still important to compare rates to make sure you’re getting the lowest possible rate for your business.
However, you may be willing to pay a slightly higher interest rate if the loan has minimum fees or other benefits. So don’t look at interest rate comparisons without some context.
Related: 3 Different Types of Business Financing and What Entrepreneurs Need to Know
7. Reasonable financing time
Although you may not need the funds immediately, you will probably want to implement your plans as soon as possible. So, check the financing time that each lender offers for their business loans. After you submit your application and receive approval, when can you expect to receive the funds in your bank account?
Some lenders can release funds in 24 hours or just a few days, but other lenders are slower. If you will have to wait weeks or months for funds, it would be a good idea to look at alternative options.
8. Solid customer support
Finally, it’s worth checking the levels of customer support offered by your potential lenders. If you have questions or concerns about your credit, can you speak to the support team quickly? Some lenders have phone helplines, while others rely solely on email or chat. So, you need to familiarize yourself with the customer support options.
It’s worth reading some lender reviews to see if there are any warnings about long call waiting times, slow email responses or other customer support issues before you become a customer.
Getting the right business loan for your needs requires some time to compare different aspects and lenders. When you follow the above factors and make the most of each one, you can save money, time and financial stress.