When a business owner decides to avail of a loan for their business, many criteria need to be considered. The safekeeping of a business’s credit records is especially important. Any business loan should match all the financial characteristics of a company. It is unwise to destroy the financial image of a business simply by choosing to avail of the wrong kind of loan. Always start with the consideration of whether a loan is required at all. Financial rearrangements can provide money that the business needs. If not, there are factors that need to be considered.
Therefore, here are 5 questions you should ask yourself before you apply for a business loan.
- What is the requirement of financing in the business and what is the type of requirement?
The purpose of having the answer to this question ensures a lot of clarity in the first steps of the availing of a loan. Figuring out the reason for financing helps the borrower answer all questions a bank or financial organization may ask. Loan applications need the borrower to be extremely specific about the purpose of the loan. There should be a concrete plan of usage of the money.
The reason will help you determine how much should be the loan amount, how long do you need to avail it for, what is the time within which you need the money, and eventually the payback schemes. Therefore, this will ensure the proper choice of financing options. Proper choice of financing options also means what kind of business loan you need. There are more than 10 types of business loans which can often become daunting to choose from.
2. What are the minimum requirements of the application?
Depending on the bank or financial organization, there is a set of general and specific requirements for the successful disbursement of a loan, business or otherwise. Some of the most important requirements are credit scores (of the borrower and the business), repayment history (if loans have been availed previously), how old the business is, what is the revenue structure of the business, financial records of the previous year, and certain other factors. Sometimes, the amount of money in the bank accounts and turnovers can only be considered for the sanction of the loan. The stability of the business in terms of all types of financial relationships is also important.
There are many types of business loans from a multitude of financial organizations available today. Therefore, it is always possible to look through the minimum requirements of multiple loan products before availing of a loan.
3. What will be the total payback and interest amount?
This is one of the most important questions to ask and answer before you apply for a business loan. Loans are long-term contracts between a business and a lender, which leads to an accumulation of interest that needs to be paid when the loan amount is paid back. As a business owner ask yourself, if the interest rate of a certain loan product is in your best interest and whether your business turnovers will be able to support the total repayment amount. Total payback and interest amount often depend on the type of loan and other terms and conditions. They can be modified and structured according to convenience by speaking to the loan agents. It is important to be careful to not overestimate repayment capabilities. Failure to make timely repayments would only lead to additional interest charges.
4. How confident are you in the performance of your business?
Take your time in predicting and evaluating the future performance of your business. The business you are acquiring a loan for needs to perform well enough to make enough money to pay back the loan amount plus interest. Sit with your team, if required, to evaluate all aspects of performance and think about possible turnovers. The objectives of the business also need to be considered before any financial commitments are made.
In terms of new businesses, especially, it is important to understand where you are going with the business and if a loan will help or end up being a problem.
As mentioned above, there are many types of loans with different terms and conditions. Therefore, apply for a loan that will not be a hassle in paying back even with a slight faltering of business performance.
5. What is the contingency plan?
Unforeseen circumstances can always throw a wrench in plans. The same can happen in terms of business loans and their repayment plans. To avoid being caught off guard, draw up a proper contingency plan. Most financial organizations ensure that a contingency plan is already laid down officially before authorizing a loan. Think of assets that can be used as collateral either at the beginning of the loan process and used in case of an emergency. Collateral can also be required in terms of secured loans.
These days, lack of contingency plans can lead to the cancellation of the sanction of loans.
A contingency plan should also be there even if the loan application is cancelled by the bank or financial institution. If under certain circumstances, the loan is not approved, but money is still required, there should be a plan in place. A secondary plan in every circumstance will only be beneficial to the business.
Asking the right questions at the right time can prevent complications that can occur later. Businesses can be unpredictable; business loans do not have to be. Loans are meant to assist in the functioning of the business. It should not lead to more problems for the business. These questions are also meant to give insight into requirements for the business and whether a loan is even the right option. There are several types of business loans with different types of terms of conditions. They are all meant to cater to specific needs and businesses of a specific kind. A manufacturing business might not have the same requirements as an export/import business. Therefore, please commit to doing all the necessary research.
