What to Look For in a Business Loan
If you are a business owner, or planning on starting a new business, then at some time during the life of your business you will likely need a loan. Whether the funds are needed to pay for your startup costs, to finance an expansion of your business, invest in inventory, buy new equipment, or for any other reason, there are many options for you.
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Determine the Purpose of the Loan and Assess How Much Money You Need
The first step is for you to analyze why you need the funds, as this will help you determine how much money you actually need. Evaluate your current business plan along with your future goals in order to assess your financial needs.
Business Loan Considerations
Here are a few suggestions for what business owners should look for when shopping for a business loan:
- Interest rates – You know you will be paying back more money than you lend, but in order to minimize the amount of the payback, pay attention not only to the interest rate itself but to whether the interest is simple or compound. If compound, is it compounded daily, monthly, or annually? The more often it is compounded, the more interest you will pay. Depending on the amount of the loan, this could make a big difference in what the loan will ultimately cost you.
- Terms of the loan – This includes things like how long you have to pay off the loan and whether there is a prepayment penalty. The time frame of the loan depends on many factors, but keep in mind that the longer you take to pay, the more interest you will be paying. Regarding prepayment penalties, some lenders make up for what they might lose in interest if you pay the loan off early by charging a prepayment penalty. You need to know this before you take out the loan and not be surprised later when you want to pay it off early.
- Conditions for the loan – Lenders always have conditions for the loans they provide. If lenders put limits on how you can use the funds, then in your application you will likely be required to state how you plan to use the funds and be limited to using them for that purpose. If you use them for something different, you can be penalized. Another loan condition may be if the loan is secured or unsecured. Secured loans are easier to obtain since it gives lenders collateral to help them get paid in case you default on the loan. Unsecured loans are more difficult and often come with a higher interest rate. Although not secured by a specific asset, if you default, the lender may still pursue collection and you may have to forfeit other assets.
Types of Loans
There are many types of business loans available. You may want a basic installment loan, similar to a mortgage, where you pay a fixed amount every month and pay the principal and interest back within a certain period of time.
Alternatively, you may choose a loan with a “balloon payment” at the end of it. This means that during the repayment time you only pay the interest. At the end of the loan period, you pay back the principal in one lump sum.
A line of credit may work for you if you want the flexibility of receiving the minimum amount you need with a payback similar to how a credit card works. There are different types of credit lines, so make sure you choose the one that best meets your needs.
Choice of Institution
You may be happy choosing a financial institution that has the best interest rate and terms. But in addition to getting the best financial deal possible, you may want to work with a specific loan provider; someone you can call if you have a problem and who will work with you personally to solve it.
There are many considerations, but if you follow some of these guidelines you should find a loan that meets your needs and allows you and your business to carry on without undue stress.