The reality of many businesses is that you will need to apply for a business loan at a certain point in its lifecycle.
Cash flow may be tight, or you’re probably looking to expand, and a business loan can be the best way to fund this.
But, before you sign anything on the dotted line, there are some essential points to note when taking out a business loan, even if it’s a small business loan.
Purpose of business loan
You must know the purpose of the loan. Most banks and private lenders will need to know the purpose of the loan. That is, what will the loan be used for? For example, you might be going through some tough trading times and need a cash boost. You might be looking at purchasing some inventory or stock. On the other hand, you may want a bridging loan to buy a property.
Whatever the circumstances are, the lender needs to know precisely what the loan is for. In today’s uncertain times, especially during and post-COVID lockdowns, there will be a period of cash flow squeeze and you will probably need financing for different aspects of your business. Without JobKeeper, businesses will need extra cash to continue trading and get them through these crazy and challenging times, at least in the short to medium term. Most lenders will now consider this when loaning you the money, but overall, if they feel you can pay back the loan, and better yet – if you have a secured asset against the loan, you should get the funding for the business.
What Are Your Loan Options?
If you plan on getting a loan for your business, it’s not as cut and dry as your standard bank loan. There are many business loan options such as a line of credit, overdraft, and secured business loans. Some of the loan terms are either fixed or variable, involve principal and interest repayments and may be required to be paid back within 12 months, as examples. As a business owner, it’s your responsibility to ensure that you get the right business loan that suits your needs. Making the wrong choice can harm your businesses cash flow and might lead to trading while insolvent which can lead to bankruptcy if you cannot find a way to repay the loan by the due date. Plus, if you have a secured business loan, you might end up losing more than you bargained for; your property! So be careful which type of loan you sign up for.
Cost of business loans
If you’re getting a business loan, you have to be well aware of the costs and fees involved. There may be ongoing monthly fees or excessive set-up fees. And, there may be hefty exit fees if you decide to payout your loan early. You have to incorporate all these additional costs into your monthly expenditures. Plus, if you’re getting a business loan to buy extra stock, inventory or perhaps a loan to consolidate debt, you will need to work out if the loan is worth it and gives you a decent return on investment.
You do not want to get into debt and buy all this extra stock or pay off debts if the interest and fees are more expensive than the debts themselves. Plus, a loan adds a certain level of pressure for the business, so make sure you can handle this debt burden and be able to pay off the interest and eventually pay back the principle.
Age of the business
If you have an established business that’s been trading well for years, then getting a business loan shouldn’t be a problem. But, if you have a new business start-up or have been trading for less than a couple of years without ever applying for a loan, this makes things somewhat harder. Lenders like to see a solid trading history where you might have taken out a loan in the past. In addition, it shows that you are a responsible business owner that takes your debts seriously. At Sparrow Loans, we can be more flexible in our approach to lending even if you a new business start-up if you are prepared to take out a secured business loan.
What’s Your Credit History Like?
If you have a bad credit history and have previously defaulted on loans, this will affect your ability to secure extra funding for your business. Most lenders will also take into account your personal lending history and credit score as company directors are usually personally liable for the loan if the business is unable to repay the full amount. It’s incredible how a small default on a past phone or electricity bill can affect your credit rating. The best thing you can do is check your credit history and pay off outstanding debts as quickly as possible. You may also need to speak to old creditors to get old transgressions off your record if they have forgotten to remove it. You can plan ahead for this by obtaining a copy of your credit report before applying for any loans.
Learn more in 10 easy ways to boost your credit rating
Is Your Paperwork in Order?
Most lenders will want to see some of your financials to ascertain if you a credit risk or not. Therefore, make sure you have your latest BAS statements and end of year financials ready, so your lender can audit them. Messy, inaccurate paperwork will not only slow the process down but probably contribute to your business loan being declined.
Lenders may also request a copy of your business trading account statement. Make sure you keep your personal and business finances separate so all business income and outgoings are captured in the business trading account. This can help you verify your cash flow and serviceability without needing your full financials to be ready.
Length of the Business Loan
Do you want a loan over a long period, or do you require a short term business loan to get you through some seasonal cashflow bottlenecks? Longer loan terms will mean that you have this debt hanging around your neck for many years, and you have to ask yourself this question; are you prepared for all these monthly interest bills? You have to be extremely honest with yourself and have an intimate knowledge of your business and its future potential before you commit to a long term loan period. Long term loans are also generally cheaper than short term loans but you will need to be wary of any other fees that might change this such as if you were to exit the loan before the end date and be liable for an early repayment fee or a break cost.
You have to be confident that your business will accommodate this extra debt over the long term. So even if there are quiet trading periods, you have to be super sure of yourself and the ability of the business to trade into the future and generate enough money to repay the debts and associated costs.