What You Need to Know About Getting a Business Loan
One main concern when thinking of setting up your own business is finding out how to finance it. Getting a business loan may be a good way to deal with financial concerns, but the available options might be confusing or overwhelming for business owners, especially the first-timers.
You don’t have to panic though. All you need to do is read through our list of things to remember to make sure you’re getting the right loan for your venture.
1. Understand how much you owe
There are two ways lenders inform you of how much is your loan. One is by telling you the exact amount of money you need to pay back and the other one is how much your interest is. If you need to make a comparison, it would be difficult to gauge if the information you have is mismatched.
What you can do is ask your lender what’s your loan’s Annual Percentage Rate (APR) is. The APR is the total amount of your loan, with the interest expense, fees, and all other costs for a year. It will make you understand how much you need to pay in one glance.
Beware though that getting a low APR does not mean you have a better offer. It still depends on the length of your loan term and other factors.
2. Limit your loan application
Being a beginner may encourage you to apply to as many loan companies as you can to have a better gauge on which loan offer and lending company suits you best. While it is not technically wrong, it can affect your credit score.
How? When you apply for a business loan, it is a requirement for the money lenders to check your credit score. To do this, they’d need to do a soft or hard credit pull—depending on their credit check policies and depending on whether you’re asking for an initial or full quote. This process can dent your credit score for each application.
To prevent the worse from happening, try to limit your loan application to a maximum of three lenders. Make sure to check their requirements and qualification criteria to gauge where your application will fit, and ask about their credit check policies.
3. Know what’s at stake if you can’t pay the loan
The majority of the lenders require collateral before they give you a loan, especially if you’re starting a new business. Before signing up or agreeing to this, make sure you clearly understand what will happen in case you failed to pay the loan on time.
4. Beware of prepayment penalties
When your loan gets approved, don’t be too excited about paying up immediately. Know that most lenders have prepayment penalties. It is the fee they charge when you pay off your loan before your due date.
To understand from the lender’s perspective, paying ahead of time means that you’re reducing the amount of interest they earn from your loan. That’s why they have a two to three per cent charge for early repayment. Some charge bigger the sooner you pay.
Be keen on small details like this or learn how to negotiate to reduce the fee. This way you avoid paying more than what you are expecting.
These are just some of the things to learn before getting a small business loan. Understanding how the industry works will help you know what to look for, what to avoid, and how to move forward. The terms and processes may be confusing at first, but with proper guidance and research, you’d find the right loan for you.
We’re a team of business loan experts in Adelaide and Brisbane that can help you plan and secure a good business loan. Get in touch with us today to see how we can help!