What to Consider Before Applying for a Loan

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What to Consider Before Applying for a Loan

Apr 15, 2022

There is a saying that says it takes money to make money, and nothing could be truer. Without enough cash flow, running a business can be an effort in futility. This is why many small business owners are usually quick to accept a loan offer or apply for one. However, it is not advisable to rush into accepting a loan- no matter how small it might be - without considering some important factors.

This article has compiled some factors you should consider before going for or accepting a loan.

Why You Need the Loan and Amount To Borrow

The very first factor to consider before applying for a loan is why you need the loan and how you plan to use it. For example, you might want to use the money to boost your inventory, get the equipment or focus on your business development. Determining your reason for taking out a loan will help you choose the type of loan to go for, which institutions to go for, and how to pay the loan back.

You should also determine the amount of money you need and make your choices based on that figure.

Lender's Reputation

Reputation is one of the important factors to consider before applying for a loan. Different financial institutions offer business loans. You can use the Better Business Bureau to check for legitimate lenders. Make sure you go for an institution with positive reviews and a high rating.

Watch out for institutions that do not require credit scores, lack a physical address, or are not transparent with their loan fees.

Type of Loan

There are different types of business loans tailored to different business needs. For instance, there are Working capital loans that help meet operational expenses.

Equipment finance loans that help in the purchase of equipment and machinery.

Lines of credit loans are similar to working capital loans.

Franchise loans are loans advanced to entrepreneurs who want to open their own franchise. And so on, thus you must do your research to determine which type of loan best suits your needs.

Collateral, Interest Rate, and Loan Fee

Before getting your loan approved, you might need to have collateral. Therefore, you must factor that into your plans. Also, take a look at the interest rate and conclude if it's something that you'll be comfortable with. Finally, don't forget to factor in the loan fees too.

Repayment Terms and Payment Process

Before you put that sealing signature on your loan form, ensure you go through the repayment terms and that they are flexible for you.

Also, have a detailed and effective payment process plan that will help you repay the loan.

Disbursement Time

Before applying for a particular loan or choosing a loan institution, check what previous customers say about the loan processing time and how long it takes to disburse the loan.

If it's a loan you need urgently, then you know you're going to an institution that can act quickly.

Wrapping Up

Before applying for or accepting a business loan, take your time to consider all the factors mentioned earlier. Remember, depending on your choices on the aforementioned factors, a loan can either save your business or do otherwise.

The opinions expressed in our published works are those of the author(s) and do not necessarily reflect the opinions of the National Association for the Self-Employed or its members.

Courtesy of NASE.org