Business loans are essential for establishing and growing any business, irrespective of its size. For small businesses, however, the considerations hold more importance than they do for large enterprises. The reason is simple enough, though – mistakes hit SMBs a lot harder than they hit larger enterprises with the cushioning to take a few mistakes in their stride. With that in mind, here are five facts to check before taking any small business loan.
The Loan Rates
The loan must be categorized by the company first, based on the reasons, the total amount, its urgency, and final goals. This is an essential step because it would then allow you to check and compare the loan rates being charged by the various lenders for that specific type of small business loan.
Startup costs and business growth are the two main reasons behind why small business loans are taken, but it is important to compare different loan products, so you can find the most competitive rates from a lender with terms you can meet.
- If it is for founding the business, have you taken the time necessary to properly estimate the repayments you can afford?
- If it is for expanding the company, will your move be a sustainable one in the long run?
Taking a loan that is too big while building a new business can lead to crushing debt unless you have made the necessary cash flow calculations. The loan amount must be in proportion to practical revenue-generating estimates of the business. As for expansions, billion-dollar companies have gone under due to debt accumulation simply because they tried to do too much, too fast. Check your reasons for taking the loan and match them with your repayment cash flow forecast for keeping loans manageable in the future.
Check the Reasons if You are Applying for Small, Short-term Loans
Why does your company need a small loan? You most certainly have an answer to that but check if the reasons are something that your partner(s), shareholders, and the top executives agree with. Hold meetings and fact check with them to see if the reasons are valid enough. New facts may come to light, which might make it possible to decrease the amount of money your company needs to handle the situation. A few of the most common and the most valid reasons behind taking out short term business loans are as follows.
- Shortage of working capital for cash flow
- Small expansions in equipment, personnel, or establishment
- Disaster or emergency management
- Operational costs and inventory refiling
- Marketing expenses
- Paying employees
- Debt Refinancing
Finally, do not forget to check your options and compare offers before accepting any loan packages. A lot depends on your business’s credit history, so putting some thought towards repairing that might be a good idea too, in case your credit score is not looking too good at the moment. Low credit scores lead to higher interest rates, unfortunately.