One of the biggest financial commitments you have to deal with when it comes to business is taking out a loan. This debt will surely go on for years depending on the agreed term, whether to keep the business alive or to use it for expansion purposes. This decision shouldn’t be taken lightly and needs careful planning and consideration as your assets, equipment, real estate, and other collaterals will be at stake.
So, what are the things you need to consider before you decide on taking out a loan? Let’s find out.
1. Business Plan
Even before you opt for taking out a loan for your business, you should first consider that you have a strong, stable, and realistic business plan. This is not only to ensure that you could qualify for the loan, but it will also help you use the money for good use in the business.
Don’t rush your business plan, just to get the cash you need. Carefully lay-out your business plan in a way that you can see where it is heading. You can also use the different resources and templates you could see online to make sure you can create a business plan you can be proud of.
2. Options
Again, acquiring a loan is not something that you should decide out on impulse. You have to carefully lay your cards on the table before you make the ultimate decision of taking out a loan.
There are a lot of ways, aside from getting a loan, that could help sustain or support your growing business. Maybe, you have families, friends, or other colleagues who want to capitalize in your business. Another good option would be to try crowdfunding for your business enterprise. You have to carefully weigh in all your options and choose the best one where your business could easily handle in the future.
3. Amount
After you have deliberately thought that acquiring a loan is your best shot to the business, then it is also important to consider how much do you really need. You should be realistic in considering the amount of money you need, including all the fees necessary for the equation.
Remember that if you opt for a larger loan, you will have to pay attention to the commercial mortgage rates , which may become detrimental to your income-to-debt ratio in the future.
4. Type of Loan
There are several types of loans that businesses could avail of. You can opt for an equipment loan if you need to finance additional equipment for your business; this is to avoid pitching for additional collateral. If you are just seeking for a small amount of money, then a microloan could be your best shot. Thus, you must also consider the type of loan that will suit your business’ needs.
5. Credit History
If you want to be eligible for a business loan, then you must have a suave and accurate credit history, whether it is personal or business. At least 600 personal credit rating or ideally 700+ will make you more fit to apply for a loan. Thus, you need to check your credit reports every now and then.
Try to reach out to the agency, once you notice errors or glitches in the report. If you want to improve your credit rating, then increasing your credit card limit or paying debts on time will help you do so.
6. Capacity
Do you think you can still afford to make loan payments afterward? You should answer this question before you decide to go for a loan. If you answer yes, then you could be at ease knowing that you still have the capacity to make regular payments. But if not, then you may need to consider other options because, in the end, you will have to face serious consequences that will affect your business’ credit rating. Also, you will have to deal with penalties as agreed.
Therefore, before you seal the deal, you must make sure that you are still capable of paying the loan regularly even during slow sales months.
7. Collateral or personal guarantee
A put-up collateral or personal guarantee may be asked by the guarantor to qualify for the loan. With this, you will gain the lender’s trust knowing that you are confident in your business, and this will also ensure them on their end that you are still held liable to pay the balance of the loan.
8. Liability
If your business is a corporation with multiple owners or partnerships, you will need to agree who will take responsibility for the loan and up to what degree. Anyone in the company with more than 20% of shares should co-sign on any corporate or partnership business.
If your company has more than 2 partners, then ask a lawyer that specializes in business finance so that each co-owner will be held liable and responsible for the business’ loan.
9. Impact
In the end, the ultimate decision to acquire a loan boils down to the best interest of the business in the long term. So that it will be worth all the cost and the risk, the credit should be put to good use in building long-term profitability to expand the business venture. Thus, marketing with a recognized expectation of a result, buying inventory on a mark-down rate, buying new equipment have shown a promising impact on the long-term profitability of the business. On the other hand, buying new furniture for the office or paying for an expensive team building may seem desirable, but in the end, they are less likely to give positive reinforcement for the future success of the company.
In conclusion, taking out a loan is not an easy decision to make. Business owners or partners should painstakingly weigh in all these things along with the consequences that go along with acquiring a loan. This decision will only go in two ways, either it can make the business stay afloat or make it sink. Whatever you decide, you will never feel sorry for taking all the time to carefully lay out your business plan, exploring all your options, and trying to do what you deem best for the company.