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No matter how big or small your business is, it is always a good idea to have a backup plan in case things go wrong. Asking for a business loan might be the best option when you need money in a hurry, but it’s not something that should be rushed into without doing your research first.
So what are some things you need to know before taking out a business loan?
Define Your Needs
Once you have your business plan and financial statements, it’s time to determine your needs.
You need to know:
- What is the purpose of this loan? Will it be used for inventory, equipment, or something else?
- How much do you need? This will help determine how much money a lender will require from you as collateral. If they want too much collateral, then there’s no point in taking out the loan!
- When do I need access to the funds (i.e., now or next year)? Knowing this can give lenders an idea of how risky or safe their investment would be if they were to make a loan with a specific time-frame attached.
Decide on a Type of Loan
Once you have a general sense of the type of loan you’d like, it’s time to look deeper into the details.
Here are some questions to ask about each type:
- How much will this cost me?
- What is the interest rate?
- How long will I be paying back this loan?
- What is my repayment schedule like? Is it monthly, quarterly, or yearly payments? And how often do they come due?
Look At The Lender’s Fine Print
Fine print is a term used to describe the information in small print at the bottom of a contract. If you are applying for a business loan, you must read through your lender’s fine print because it may contain information about how your loan will be paid back and what fees you might have to pay if things go wrong.
You can learn more about your business loan by looking at your lender’s website. This will help you ensure they are licensed, registered, and regulated by their local government authority before making any decisions about borrowing from them.
Consider Whether You Will Be Able to Repay Your Loan
Before you sign up for a business loan, it’s important to consider whether you will be able to repay your loan. If you cannot repay the business loan, you may have trouble paying back other loans or getting more credit.
To determine if a business loan is right for you and your company:
- Determine how much money the business can make over time.
- Look at what your expenses are going to be and how much money they cost per month/year/etc.
- Figure out how long it will take before the business is making enough money that it can start paying back its debts (including any interest). This includes all of the above factors plus additional expenses such as electricity bills or product purchases that are needed but not immediately profitable.
You Need to Have a Clear Financial Plan Before Taking a Business Loan
Before taking a business loan, you should be able to answer the following questions:
- What is your monthly income?
- How much money do you spend each month?
- What are your financial goals for your business and beyond?
- What are your credit score and debt-to-income ratio?
- Can you show proof of revenue or profits from previous years of operation (or at least be able to give reasonable assurances that they will come in)?
Your sincere answers to these questions will go a long way to inform you if you’re fit to take out a business loan or not.
Conclusion
If you plan to take a loan for your business, make sure you know what you’re getting into. Take time to consider all the options available and be aware of the risks involved in each type of loan.
A good financial plan will help ensure that you get the right type of loan for your needs, so be sure that yours includes enough information about both the costs and benefits associated with taking out this type of financing option before making any final decisions on whether or not it makes sense for your company.
Lastly, if you enjoyed this article on the many different ways to prepare for a business loan, you may also be interested on our other resource guide on planning for retirement.
Both of these processes can be confusing at first, but with the right guidance and preparation in place, you will be able to make the best decision for yourself, your business and your future.