Business loans: the do’s and don’ts to consider in 2020

As a business owner, you need to take risks when the time comes. And, when we talk about risks, we mean calculated ones. Ones that will help improve your business at the end of the day.

Business loans: the do's and don'ts to consider in 2020
CREDIT LIFELINE: Knowing what your business needs in order to grow will allow you to assess whether you need a business loan or not. PICTURE BY Financial Mail

Now more than ever small businesses are forced to consider business finance in order to keep their businesses afloat…

The new year is in full swing, and you already have a thousand things to do for your business. It’s vital that businesses grow each year, even if it may seem insignificant. Whether that is by purchasing equipment to improve production or moving into a bigger space so that you can expand your teams. 

Now, changes can be a big expense to any company, ones that may require you to apply for a business loan. We all know that business loans can be handy in time of need; they ensure your business stays afloat and helps you stay relevant in tough and competitive times. However, as important as it is to get business finance, you still need to take the correct steps, and at the right time. 

Because this is borrowed money, the last thing you or your business needs is to find yourself in a costly predicament. More so at the beginning of a year. 

So before you start applying for business loans take a moment to read these do’s and don’ts. 

Only apply when the need arises 

Just because lenders offer business finance, this doesn’t mean you need to apply for a business loan. It can be tempting to apply, but remember that this loan needs to go towards a business necessity. So, make sure you know what the money will be put towards. Not only for your sanity but for when a financial advisor asks you. This also means you should not seek financing everywhere. Yes, you need to weigh up your options, but you can do that by taking a look at lenders’ websites and visiting their branches. 

You do not want to apply to countless financial institutions, as this will affect your credit score. This is mainly because every time you apply for credit, a lender takes a look at your credit score and makes a hard inquiry. Hard inquiries stay on your credit history. Now if you have a number of hard inquiries on your credit report, this shows other lenders that you’re in desperate need of capital. 

Some lenders may understand that you have been applying and that’s why there are hard inquiries, while others may see you as a risk. And that’s the last thing you want; to be seen as a risk. Being seen as a risk will either get you high-interest rate loans or improve your chances of being declined. So, be strategic and only apply when needed and sparingly. The best route to go is to gather as much information online as possible and think before you send a business loan application. 

Do your homework and know what type of funding is available 

Gone are the days when there was only a traditional business loan or revolving credit. Lenders now have specialised funding which includes; leasing or asset finance, vehicle financing, small business finance and more. So, before you fill in a business finance application, do your homework to ensure you get financing that is tailored to your needs. So, take time to look at which type of corporate financing is available, and whether it fits your needs at that time. This not only makes it simple for you but also means that you’re catering to your business’s exact needs. 

Do explore options so you can find the best deal

You need to know how much the total cost of the loan will be. This means having a round figure and understanding how much you will have to repay once the term loan has ended. Knowing this upfront will ensure you avoid getting into an agreement with lenders that have a high-interest rate or any other hidden requirements. So, always keep your options open and don’t put all your eggs in one basket. With the use of the internet, you can now find online loan affordability calculators. This tool is to help you see how much you can afford and the total cost of the business loan. This will ensure that you see whether or not your business can actually afford to take a loan now or not. And, ensure that you go into an application process with your eyes open with no surprises in the future. 

Do keep all your business documents in place

Whether it’s your business’s financial statement or business plan, lenders might want to see all your business documents. So, prior to making any arrangement or visiting a branch, make sure you have all your documents with you. This will show lenders how serious, and how organised you are. More importantly, it will show that this is a thought-out decision rather than a hasty one. 

Don’t go into this with the wrong figures 

There are times when we downplay things. Whether it’s how much debt you have or how much you make. Well, when applying for a loan, make sure you don’t underestimate or overestimate your financial figures. This will put you in a difficult situation, especially if you are a small business and you overestimated your income. This can lead to some expenses not being covered by the end of the month. So, before you go to the lender, make sure you take a look at your figures and see that everything is as it should be and that you can afford to take out a loan. 

Don’t be afraid of risks 

As a business owner, you need to take risks when the time comes. And, when we talk about risks, we mean calculated ones. Ones that will help improve your business at the end of the day. Now, some owners are sceptical about applying for loans, and they prefer the bootstrapping approach of the business. Bootstrapping is when you use your personal savings, and other forms of income, to finance your business. This means you don’t apply for business funding. Now, this may seem like a good idea as you won’t owe anyone. But, it can also be detrimental to your business. 

So, even if you are bootstrapping, and you see that you are in a tight position, remember that there is nothing wrong with taking out a loan when the need arises. All you need to do is be strategic. Know your company’s credit score and apply strategically. 

Don’t ask the lender how much you qualify for

This may seem like a mundane question but this will show you in a bad light to the lender. There are online tools for a reason, and asking the lender how much you qualify for shows that you didn’t do a substantial amount of research with an affordability calculator. And, it shows the lender that you are unsure of how much you want. Instead, inform the lender of how much money your business needs. And, if you are comfortable, you can inform them of what the money is needed for. This will impress lenders and proves that you know exactly what you want. 

Don’t only focus on the interest 

Whenever people fill out a loan application, their thoughts always go to “how much will my interest be?” or “how much interest will I have paid at the end of this loan?” Now, these are all important things you need to know and think about. But, there is more to a loan agreement than interest. You need to also focus on other criteria. For example, the loan term, flexibility, whether or not they will let you settle earlier, and more importantly,  what the loan requirements are. These factors will help you determine whether the loan at hand is the right loan for you. 

Final thoughts

Getting a loan is a big deal, but it doesn’t have to be one that leaves you feeling uneasy. All you need to do is sufficient research and know why and how much money you want. If you show lenders that you are confident in your business and yourself, then they have no reason to not give you the benefit of the doubt. And, even if you’re approaching a lender online, make sure you conduct yourself professionally and handle everything accordingly. They cannot see you, and judge you, so you have to present your business well and be transparent.

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