Whether it’s for increased cash flow or business expansion, odds are a small business is going to need a loan at some point in its life. However, applying for a business loan involves a lot more than just filling out some paperwork. There are numerous things to consider before taking out a loan, and doing prior research is key to making the best decision for the financial health and longevity of your enterprise.
Today, we share 6 things to consider before taking out a business loan. By taking these factors into account upfront, you are likely to maximise the benefit and profitability you derive from your loan. Read on to find out more.
1. Talk To A Finance Professional
Securing the right finance solution for your business is key to helping your business grow, invest, hire and increase profitability. This is why the first and most important thing you should do before taking out a business loan is talk to a financial broker or advisory company like Core Financial Group. The truth is, securing business finance is becoming increasingly difficult for many business owners, with businesses facing:
- Complicated lending requirements;
- Limitations presented by a current lender’s policy;
- Regularly changing relationship managers;
- Incorrect or expensive finance structures; and
- Inability to access the required finance.
Thankfully, many of these issues can be remedied with the help of a financial professional who can help you plan and manage bigger financial decisions so you feel confident that your future business plans are achievable.
2. Understand Your Loan Purpose
Whether your goal is to expand into new markets, purchase new equipment or offer an improved product/service to your consumers, understanding and defining your loan purpose is the first step to choosing the right loan. Oftentimes, this will also be the first question asked by potential lenders, making it all that more important for business owners to have a clear idea of their goals and objectives for taking out a loan.
A few of the most common reasons for taking out a business loan include:
- Expanding business operations
- Managing cash flow
- Buying a vehicle or equipment for your business
- Purchasing inventory
- Building your business credit
3. Calculate How Much You Really Need
When you apply for a business loan, you obviously need to know how much money to request. If you’re looking to borrow to buy an asset, knowing the amount you need will be reasonably straightforward. However, if you’re borrowing to cover a potential cash shortfall, working this out can be a little more involved. In most cases, it helps to be brutally honest about exactly how much you can afford to borrow. You don’t want to borrow too much that you struggle with the repayments but you also don’t want to borrow too little that you won’t get the benefit of the loan.
As a general rule, we encourage business owners to do some cash flow projections to figure out how much you can afford in repayments and utilise tools like a business loan calculator to find out how much you actually need to meet your goals.
4. Explore Your Lending Options
Another thing to consider before taking out your business loan are the lending options available in order to work out what the best choice would be for your business. Aside from the traditional lenders, there is a growing trend in Australia towards alternative lenders to provide business loans to SMEs. Whereas small businesses are often turned away by banks and major credit unions (research has shown that banks reject around 75% of small business loan applications), alternative lenders offer business loans that are accessible, flexible, and quick to fund.
Additionally, because alternative lenders aren’t as stringent in their application requirements, the lending process is usually quicker compared to traditional banks. Not only can you get approved in a shorter amount of time, but funds distribution may also be faster.
5. Understand The Fees & Charges
Business loans go way beyond simply borrowing funds and eventually repaying them. As such, it is vital that you understand the true cost of any loan by comparing all the rates, fees and charges. For example, many banks/other financial institutions charge a fee of 2.5-3% on the principal amount for processing a loan application. Some fees you may be charged include:
- Ongoing monthly fees
- Early repayment fees
- Exit fees
- Valuation fees (if you choose to secure your loan)
By having a thorough understanding of the fees and charges associated with your business loan, you will be better able to avoid surprises or unexpected costs involved that you haven’t budgeted for. Because fees can make a big difference to the cost of business finance, it is also always a good idea to compare your options beforehand.
6. Get Your Paperwork Ready
Lastly, preparing your paperwork and business documents is an essential step that could help your lender make a decision sooner, and a general rule of thumb is that the more information you can supply the better. You may be asked to provide:
- Annual financial statements for the last two years;
- Credit reports;
- A copy of the lastest full tax portal report;
- Proof of individual income;
- Budget and future cash flow projections;
- Bank statements;
- Identification; and
- A few extra things if you’re a start-up business.
In addition, required paperwork may vary by lender, which can include business licences and other paperwork. Although there are numerous variables considered during the application process, having the documents mentioned in this post available will certainly be in your best interest.
And there you have it – everything you need to consider before taking out a business loan. We hope that this article has given you some valuable insight into the many considerations that go into securing the best loan to further boost business success.
What are some of your tried-and-tested tips for business owners looking to take out a loan? Be sure to leave your thoughts and advice in the comments section below.
