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Assessing a Business Loan - Small Business Loans Do's and Don'ts
You are an entrepreneur who is about to start up a business but lack sufficient capital to do so. What would you do? You decided to apply to the Small Business Administration (SBA) loan program for a loan; that’s great!
It is no doubt true that to ride on the ever expanding wheels of business, one must be equipped with the fuels of capital and adequate funds. But it is important to mention that that should not pose a limitation to pace of our spirits in the course of setting up our businesses.
A loan is a viable option. It’s risky right? That’s what entrepreneurship is concerned with, “risks”. However, the risks we take as entrepreneurs must be appropriately guided by the best channels of intelligence and logic.
It is therefore imperative that you are sufficiently informed on things to watch out for before applying for any loan. Below are a number of factors:
Avoid These Common Small-Business Financing Mistakes
1. Apply to the Minimal Number of Loans
The more we apply for loans, the less aesthetics we possess in the perception of lenders, and this is expressed in a reduction in such a person’s credit score. Now, even though you are sure to progress positively in your business, it is important to keep the loan option as a contingency plan.
But with a depreciated credit score, it would update a difficulty in securing loans subsequently. A smart way around securing a loan and still maintaining a healthy credit score is by checking carefully through the lender’s qualification criteria, and ensuring that you are well informed regarding the lender’s countenance toward credit checking.
2. Know the Charges on the Loan
Some lenders use the method of 3%-9% per dollar per year or per #1000 per year; this is often called Annual percentage rates (APR), and it’s the cost incurred on the loan per annum. Some others use the usual interest rates.
Whatever way is chosen, do well to calculate the cost of the loan and be on a safer side to estimate which loan is more favorable than the other. Also it would guide you in estimating what your returns would be like, then weighing it in a ratio against the interest rates, to project if you are going to be gaining by taking such a loan.
3. Watch Really Carefully for Prepayment Penalties
Usually, the goal of most lenders is to make an optimal interest at the end of the agreed time frame for refund of the loan. Refunding the loan before the stipulated time implies they would lose some of the interest that would have accompanied the time left, hence they adopt a seemingly punitive measure known widely as “prepayment penalty”.
Some prepayment fees are rather alarming when compared to the interest you would have ideally paid, you have to watch out for these. There are however some organizations like the SBA that do not have a prepayment penalty when they give loans. Always try as much to be aware of this policy before applying for a loan.
4. For Flexible Expenditure, Adopt Line of Credit Idea
Yes, because loans are in such a way that irrespective of the fact that you perhaps never used all of it in running the business, you still get to pay interest for it. In the case of line of credit, you are allowed access to the fund with a limitation on the maximum usage.
You only get to pay interest on funds you actually used to finance your venture. Now for short-term flexible enterprises involving seasonal expenditure, it is logical to recommend the approach of securing a Line of credit rather than a loan.
It affords you the chance of utilizing the fund in the best possible way without having to waste it—and subsequently yield a smarter return on investment (ROI).
5. You must be Completely Aware of any Collateral Involved
Trust in its totality is seldom established in business. In the formality of securing loans, most lenders seek a collateral, a referee (a guarantee), or a lien at least. In the case of a collateral, an important or highly priced property of yours is put at stake; that is right is given to the lender to claim possession of it if you fail to pay back the loan in the stipulated or agreed time.
Also, a referee is someone of some who agrees to can be held to responsibility if you fail to pay back; he would be willing to pay if you do not. The agreement might be a sort that does not involve specific collateral, in such a case, the lender could seize any possession of yours that he deems equivalent to the loan you have failed to pay back.
In conclusion, as important as it is to take loans to lift your baby business off the ground, it is also necessary that you know the “dos” and” don’ts” of assessing a business loan.