Questions to Ask Before Taking a Small Business Loan

Businesses are built on capital. You need Funds for hiring employees, purchasing machinery and equipment, marketing, sales, and what not. This is the reason why so many entrepreneurs and even seasoned businessmen take small business loans from time to time to fulfill their financial requirements.

If you are planning to take one, be sure to ask yourself the following questions first:

  1. Do I Really Need This?

It is such an ordinary question, yet it is probably the most important of all. Debt is not always bad. However, the thing to remember here is timing and requirement.

What do you need the loan for? What’s the purpose? If you have tonnes of purchase orders that you can’t meet with your current revenue, then getting a loan will be a good idea. This is because it will help you increase the profits and expand your business. However, if you want a loan to get a better office space, or for buying equipment for future business expansion, then maybe you should reconsider.

  1. What’s my Credit Score?

Gone are the days when business loans could be availed on the basis of goodwill alone. These days lenders take all kinds of measures to minimize the risks. One of these is the credit history of the applicant.

No matter which bank or NBFC you will apply for the loan at, they are going to check your credit history. If it looks good, you will get the loan. However, if it’s not, then the odds are low. Best case scenario- you will get a loan at a high rate of interest. However, it can actually do more harm than good.

It’s highly recommended that you check your credit report before applying for a loan. If your score is below average and if you are not in a hurry, you can work on it first and make improvements. Once you have accomplished that you can get a loan easily and at an attractive interest rate too.

  1. How Much Money Do I Need?

There is a popular misconception floating around that a lot of money can solve all your problems, including the business problems. However, that is not really true. This is because the money you get in the form of a loan comes with several conditions. For starters, there is a high rate of interest linked to it which can make a big difference. Also, more money also means a longer term.

Ideally, you must get a loan that’s enough to increase your return on investments (ROI). If the loan is actually going to reduce your ROI then you should reconsider the entire idea itself. Also consider the fact that you will be paying EMIs every month which will be, of course, deducted from the cash flow. Plus, you need money for staff salaries, utilities, rent, inventories, and what not. The bigger is the loan amount, the bigger will be EMIs. So, be sure to see that you have enough left after dealing with all these expenses.

  1. How Long Would It Take me to Repay?

The term of the loan is something you must consider carefully. As long as you are in debt, you would need to take out a portion of the revenue every month. So, choose a term with regard to your business projections. Do you think you will be able to sustain your current cash flow after the loan, or would you need more time so as to prevent financial stress? These are some of the things to think about before making any decision.

  1. What are the Prepayment Charges?

Say, you obtained a loan for a term of 5 years. However, your business did well beyond your expectations, and in 4 years you have enough money to repay your entire debt. So, you go for it, only to find out that you have to pay a hefty fine in the form of prepayment charges.

Save for a few exceptions, banks usually charge you for repaying your loan prior to the actual completion of the term. It is best if you can find a lender that doesn’t have any such condition.

Business loans are often the best option for raising capital for your business. However, there are other options too, such as invoice financing, equity sale, etc. which you can also consider.

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