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If you need funds for your enterprise, it can be very tempting to go for the first business loan on offer. However, there are a number of things you should look for before you sign on the dotted line.
1. The right loan type
As with personal finance, there are several different forms of business loans, so you need to choose the one that best suits the needs of your enterprise.
- Traditional loans: These are the business equivalent of a personal loan, which can be secured or unsecured. You’ll borrow a set amount and have a set repayment schedule with a fixed interest rate.
- Line of credit: A line of credit provides you with a set funding amount but you don’t need to receive and pay interest on the full amount. You can call down funds as you need them and you’ll only pay interest on the amounts you borrow.
- Equipment financing: If you need funds to purchase equipment, this type of business lending is designed to suit your needs. The piece of equipment you purchase will act as collateral for the loan, so you can usually access more flexible terms.
- SBA loans: SBA or Small Business Administration loans are an option if you would struggle to qualify for a bank business loan. The lending criteria is more flexible, which could be a more agreeable choice for new enterprises.
Before you agree to a business loan offer, it is well worth assessing the other types of business lending to confirm the loan is the best fit for your enterprise.
2. Manageable loan repayments
Before you sign the loan contract, you should have an opportunity to check the details of the loan repayment requirements. You will need to think carefully about whether you can comfortably accommodate the monthly payment in your budget, not only now but throughout the lifetime of the loan.
If you have concerns that the payments may be difficult, or you may struggle to meet 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 have a massive impact on your credit.
Related: The 7 Different Loans You Can Get as a Business Owner
3. Reasonable loan fees
This follows on from the previous point, but you should also be fully aware of what fees you will incur with your new business loan. In addition to paying interest, you may incur origination fees, and processing fees. These will be added to your loan principal or you’ll need to pay them upfront. Ideally, your new business loan will have little or no such fees.
You also need to watch for the fees you may incur during the lifetime of the loan. For example, you don’t want to get stung with a massive late fee if there is a mix-up at the bank. It is also a good idea to look out for early repayment fees. If your business finances change and you want to clear the loan, you won’t want a loan that imposes a hefty early repayment fee.
4. A good lender reputation
Unfortunately, not every lender in the market offers the same level of service, in fact, some can be downright risky. The adage of “too good to be true” certainly applies here. So, it is vital to investigate the lender’s reputation and be on the lookout for some red flags. These include:
- No credit check requirement: If a lender does have minimum credit score requirements or does not require a check of your credit score by soft or hard pull inquiry.
- No verifiable credentials: If the lender does not have a professional website and does not provide details of a physical address.
- Lack of fee transparency: Lenders should be very clear about their loan fee structure, so you are completely aware of how much the financing options will cost.
- Pressure selling: If the sales rep is trying to pressure you to immediately accept a business loan offer without presenting you with information and the time to study it.
5. The correct loan amount
While it may be tempting to get the biggest business loan you can get approved for, this is not likely to be a good idea. Likewise, if the loan offer won’t cover your immediate funding needs, it is not the right choice.
Think carefully about what funds you need and how you’ll use them, so you can be sure to obtain a loan for the correct amount.
6. An attractive interest rate
As with any form of finance, your interest rate will determine the cost of your business loan. Lenders will use a variety of criteria to determine your risk profile and therefore your rate. However, these criteria vary from lender to lender, with some lenders being more rigid and some lenders being more flexible.
If you have a brand new enterprise, you’re not likely to get the best rates, unless you have excellent credit yourself. But, it is still important to compare rates to ensure that you’re getting the lowest possible rate for your enterprise.
However, you may be prepared to pay a slightly higher interest rate if there are minimal fees or other benefits to the loan. So, don’t look at the interest rate comparisons without some context.
Related: 3 Different Types of Business Financing and What Entrepreneurs Need to Know
7. A reasonable funding time
While you may not need the funds urgently, you are still likely to want to implement your plans as soon as possible. So, check the funding times 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 only a few days, but other lenders are slower. If you will have to wait weeks or months for your funds, it is a good idea to look at alternative options.
8. Solid customer support
Finally, it is worth checking the levels of customer support offered by your potential lenders. If you have queries or questions about your loan, 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 be comfortable with the customer support options.
It is well worth reading some reviews of the lender to see if there are any red flags about long call wait times, slow responses to emails or other customer support issues before you become a customer.
Bottom line
Getting the right business loan for your needs requires some time to compare the different aspects and lenders. When you follow the factors above and make sure to maximize each of them, you can save money, time and financial stress.
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Baruch Mann (Silvermann)