Do Your Homework Before Cinching A Small Business Loan

When you want to get a loan for your business, there are some factors you may have already thought through, while there are some that may not have occurred to you but ones that you ought to have answers to before you proceed with the loan. These may be questions that you need to address to yourself or to your lender.

Questions to yourself:

  1. Why do I need the loan?

The answer is not as straightforward as it seems. Articulating the purpose of the loan is like praying. It’s not so much that god doesn’t know what you want, but it helps you understand what you want. In turn, spelling it out for our own benefit helps answer other questions, anticipate further issues, and figure out solutions. For instance, if you say you need the loan to purchase quick turnaround inventory, you will understand that you shouldn’t be fixing yourself up for a 4 year long term repayment plan.

  1. What figures am I looking at?

You should have made a thorough study of what you need the money for and, therefore, know how much money you are going to need. Asking for less than you need defeats the purpose entirely; asking for more than you need means you have that much more to pay back, and that you haven’t actually thought through the purpose for which you need the loan. Borrow just enough to fulfil the requirement.

  1. How soon do I need it?

The reason why you need the extra capital will usually dictate how fast you need it. Let’s say you plan to invest in some expensive equipment to grow your business prospects. This is not a sudden decision that caters to an immediate need, so the immediacy is not as pressing as, let’s say, requiring additional capital to serve a new contract. The latter could mean an opportunity cost, and, therefore, spells urgency.

Once you know what you want, you need to look at lenders who can provide the right offer that creates value in your business instead of sinking it into a quicksand situation.

Questions to your lenders:

  1. Do the terms of the loan suit my business requirements?

Since you know what you need the money for, you can decide on whether you need to approach a long-term or short-term lender. This includes understanding the loan terms and applicable rates. The lender’s terms must fit your business.

  1. What interest rate are you levying and what will my total cost be?

Don’t get fooled by vague rates or hidden costs that actually lie waiting to bite you. Find out and compare the APR (Annual Percentage Rate and different Dollar Costs. APR, as the name suggests, gives you the total fee, inclusive of the interest and originating fees, except that it’s in percentage rate, and even if your loan is for a few months it will be expressed as an annual rate. Dollar Costs tell you how much your loan costs in dollars, i.e. the difference in the total money owed and the actual loan amount.

  1. By what means do I repay you?

Paper cheques or automatic debits from the business’ bank account? Usually the latter is preferable for both parties for a few reasons. It makes the management of collections easier for the lender. It saves you the trips to the bank and helps you be punctual with payments, which in turn polishes up your business credit profile. What you need to make sure, though, is that you understand the exact amount that will be debited. Is it going to be a fixed payment or will it vary. What is the frequency of the payment – daily, weekly, monthly? Does ‘a day’ actually mean ‘one business day?’ What happens if there are insufficient funds in your account? A good lender must be willing to work with a borrower who proactively comes to them with a problem.

  1. What is the duration of the loan application process?

Naturally the time taken to process a loan will depend on the kind of loan, the amount, and the kind of vetting required. This could take from a day to a few months. However, weed out the lenders who have a long drawn process of approval, and find a lender who can make a quicker decision.

  1. Will you report my credit history to the business credit bureau?

Don’t assume they do. Ask this question very clearly. And don’t be happy if they say they don’t. Your good credit behaviour will help you establish a strong business credit profile, which is necessary for the future. Merchant cash advance providers don’t report this so you may want to be wary of accepting from them. For SMBs, remember that this is an important consideration.

These are the first and fundamental steps to take to ensure your own safety whilst landing a loan for your business.

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