An entrepreneur might have a lot of great, but none of them will materialize unless they are backed by proper funds. This is something every small business owner realizes. In order to make money, they must need money as well. And since most of them do not possess that kind of capital, their only option is to borrow the money. However, most small business owners are confused when it comes to choosing the ideal small business loan.
If you are troubled with questions like how to get a small business loan or how to apply for one, here are six key aspects you need to remember before getting a small business loan.
1. Loan Amount
First and foremost, you must be specific about the loan amount. You must be clear about the number of liquid funds you want. You also need to be realistic and flexible while mentioning the loan amount you are looking for in the application form. It is also likely that the lenders are going to check your records as well as the growth potential of your business. The loan amount is much more likely to decide your ideal lender. If your lender sanctions too small an amount, your needs may not be fulfilled. Therefore, you must be sure about the amount likely to be approved by each lender.
2. Loan Cost
Most people only consider the interest rate while getting a small business loan and ignore the total cost of borrowing. While the interest rate is a significant factor that determines the cost of borrowing, it is not the only one. You must also ask your lender about the Annual Interest Rate (APR). This includes all the fees and charges like documentation, origination, etc. One must also be careful about the penalties. Therefore, you must compare every aspect of the cost of your loan before finalizing one.
3. Mode of Disbursal
Most business loans usually come in two modes of disbursal – an installment loan and a line of credit. In the first mode, the entire loan amount is disbursed at once. The lender deposits the whole amount to the borrower’s bank account. In comparison, the line of credit mode of disbursal involves a revolving credit where the borrower can withdraw only up to the maximum limit.
Your preferred mode of disbursal depends on your need. If you are looking for a lump sum amount, you may opt for an installment loan. On the other hand, if you wish to have your money in small parts, you can go for the line of credit mode of disbursal. Therefore, you must be clear about your needs and preferred mode of disbursal before finalizing your loan.
Read Also: Startup Business Loan Options for Entrepreneurs
4. Fund Use
In most cases, the lenders are going to ask you about the use of the required funds, so you must be ready with a convincing answer. Since the approval of your loan amount ultimately rests with the lender, you must convince him that you are going to use it in a productive manner. On the other hand, if the lender feels that you are clueless about using your loan, it is highly likely that your loan will not be approved. Therefore, try to find a lender who understands your business vision and is more likely to help you financially.
You must keep some assets as collateral if you wish to secure a business loan. From your residential property to your office to inventory, you must collateralize something to avail yourself of a business loan. Some lenders also accept your business’s future revenue, like future sales or account receivables, etc. Therefore, you must approach a lender who finds your assets valuable enough to keep them as collateral.
6. Sales Revenue
Your sales revenue is an essential factor that will be considered during your loan allotment process. Your sales revenue determines the creditworthiness of your business. Lenders might consider you a high-risk customer and impose a higher interest rate on your loan if you do not have promising revenue. In such a case, acquiring a loan at competitive interest rates might become difficult. Therefore, if your sales revenue is down, you must declare this fact well in advance to acquire the best possible loan for your business.
If you are looking for a small business loan in the initial stages, you must be very careful. If you make the wrong choice, you may end up in a situation where you are unable to pay off your loans. Therefore, it is better to conduct some research on your end and find the best possible small business loan option for your business. The correct loan option will support your business journey and help you become an established entrepreneur.
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