Over the years, loans (either through financial institutions or friends and family) have been one of the main sources of finance for businesses. Though there are other effective ways to fund a business, loans are sometimes imperative and unavoidable, since they are one of the financing opportunities that quickly come to mind when seeking funds.
Business owners apply for a loan for various reasons such as starting a business, expanding the business within or outside the current location, purchase of equipment, the need for working capital to sustain the operations of the firm within a certain period, etc. Though some of these reasons may require different types of funding or sometimes a re-evaluation of your business and spending pattern to determine alternatives.
While business owners are often inclined to accept the first offer that comes their way, it is critical to note that not all business loans are right for you. You need to carefully consider your needs and other different factors which we will discuss below.
- The Purpose & Loan Tenor
Determining the type of loan needed should be informed by the purpose of taking such a loan. There are good reasons and there are better reasons for getting a loan. It is important to have specific goals and be clear as to how the loan will help your business grow or improve your profit. This would enable you to determine the amount needed and tenor. For instance, long-term loans are advisable for the purchase of assets while short-term loans will be suitable for short term or working capital needs.
Often, financial institutions request a business plan as part of the requirements to obtain a loan. This is to ensure that you have considered the reasons why you need the funds, how you intend to use them and the potential impact it would have on your business.
- The Loan Requirements
The requirements for a business loan defer depending on the amount sought and the tenor of repayment. Some small business loans may only require that your business be registered with the Corporate Affairs Commission, and with a track record of inflows and experience in your line of business. Some bodies also require collateral- which is usually of more value than the amount requested- and your credit profile through a credit bureau. Other options may, however, not consider all this. The stricter the loan requirements, the less attractive it will be to the business owners.
- The Interest Rates & Other Charges
A high-interest rate may plunge the business into trouble or liquidate it. Interest rates and other charges are very important factors in choosing a loan to contract. Also, the more knowledge of the charges you have, the better your assessment of the business’ ability to repay as at when due.
Business owners should also consider charges such as prepayment penalty or those that may arise on the anniversary of the loan and other charges. They are to critically evaluate escalator clauses and or terms and conditions before deciding on the option to settle for. Efforts should be made to estimate the effective interest rate of the various options over a common period before the final decision is made. The lower and simpler the charges, the better the loan option.
- The Processing Timeline
Some loans can be processed within 24hours while others require a longer period before disbursement. Most business owners would prefer a loan with a shorter processing time frame. Given different loan options with similar terms and conditions but with different processing timeframes, most small business owners will prefer their loan sooner than later. This is not only due to time value perception but also the fear of surprises from lenders arising from longer processing time. Also, timely processing implies early disbursement which will allow the borrower to commit the funds to quicker usage and returns.
- The value-added services offered by the lender
Value-added services and other business support offered by the lenders such as borrower’s education, business supports, industry update, restructuring options as well as reduced charges on other operational accounts with the lenders, etc, should also be taken into consideration in choosing a suitable business loan. Access to business communities which would improve your access to a network of potential customers should also be considered, as this provides other avenues of growth for your business.
While considering the points discussed above, it is also important to seek expert advice. There are business development consultants who are vast and abreast of various funding opportunities such as grants, single-interest loans, equity financing options, amongst others you may be unaware of. In addition, these consultants can better comprehend the grey areas of the various terms and conditions that could seem cumbersome for a small business owner to grasp easily while saving you the stress of having to go through various options before making a choice. Talk to one today