- You need to understand a few things before applying for a business loan and whether it is right for your business.
- Research the loan type, repayment, interest rate, tenure and work out all additional fees and charges.
- Get your documents ready to avoid any delay and to increase the chances of a successful application.
If you’re considering getting for a business loan, it’s best to be as prepared as possible. You will need to research and understand as much as you can about how your business loan can help achieve your goals. Below are some of the questions you need to ask yourself before applying for a business loan.
1. What is the purpose of the business loan?
This is an important question as you need to be as clear as possible about why you are borrowing the money. A lender will always ask you this question and some of the most common answers include:
- To grow your business
- To help manage cash flow
- To buy a large asset such as a vehicle or equipment
2. How much do you need to borrow?
Remember that need and want are two different things. You must be clear on this and work it out beforehand by drawing up a budget and if you need to, use an online loan calculator to help you figure out things such as repayment schedules and costs. Generally, if you’re looking for a business loan to buy an asset, you’ll know how much you need to borrow. Otherwise, it’s up to you to do some sums.
3. How much can you afford to repay?
You need to factor in what your repayments will be and remember that these will include interest rates and possibly additional fees. Work out how long you need to make these repayments as this will affect the length of the loan term.
Don’t overstretch yourself financially as you don’t want to default on payments, pay late or miss payments. This will damage the credit rating of your business which could dampen the chances of future borrowings.
4. What type of loan do you want?
It's important to choose between a secured or an unsecured loan. Both have pros and cons and the right choice for you will depend on several factors in your situation such as:
- what you are using the loan for
- your ability to pay the loan back
- whether you have any assets to offer as collateral
5. Do you want a fixed or variable interest rate?
Again, this will depend a lot on your individual situation because it will affect the amount of your repayments, so you’ll want to think carefully about the right option for your business.
With a fixed rate interest loan, your lender will take on the risk if interest rates go up or down, whereas with a variable rate, it’ll be up to you – for better or worse! Generally, a fixed rate is best if you’re on a tight budget and need to know exactly what you’ll be paying each month.
6. Do you have all the necessary documents ready?
There are quite a few documents you’ll need when you apply for a business loan. One of the most important is to have a detailed business plan available for a potential lender to study as this will help them to understand the direction your business is going and any projected financial forecasts. Being organised and having your documentation ready can help to avoid any unnecessary delays in finding the right business loan for you.
7. Do you understand all the fees and charges you’ll need to pay?
Always check and budget for additional fees, charges and due dates on your business loan before you sign on the dotted line. These could include fees such as:
- ongoing monthly fees
- establishment fees
- early repayment fees
It’s always good to know as much as possible before you commit to getting a business loan. Do your research, get organised and make sure you’re 100% happy with the loan before you go ahead with taking your business to the next level.