Capital is always a necessity when starting a new business. If you haven’t saved up enough, then a business loan is your ideal option to reach enough money for your capital.
There are many business loans out there that are within your reach. But, before you apply for a loan, here are some things you need to know before taking out a business loan:
- Good Credit
Before wasting any time in applying for a loan, the first thing you need to check is your credit score. There are two types of credit score you need to consider: a business and a personal credit score.
- Business credit score: takes into account the creditworthiness of your company as a whole. This means that lenders will look at historical payments with suppliers and other lenders.
In addition to that, your company background, legal issues, and business model will also play a role in your business credit score.
- Personal credit score: considers creditworthiness on an individual level. Typically, this will come from your personal credit cards, personal bills, and other personal loans.
Both of these will play a role in the decision making of lenders to approve or disapprove your business loan. With this in mind, you need to know beforehand if you indeed have good credit. You can prepare for this by trying to increase your credit score before taking out a business loan.
Before taking out a business loan, make sure that you have all the documents required in place. For business loans, lenders usually ask for a lot of documents. Preliminary documents include:
- Certificate of Registration
- Articles of Incorporation and By-Laws
- Tax Identification Numbers
- Business Permits and IDs
If one of these documents is missing, there’s a huge chance that a bank will not lend you money.
Fortunately, there’s a workaround if ever you encounter this problem. Instead of applying for a commercial business loan with a bank, you can opt for online payday loans by Achieve Finance. With an online payday loan, you’ll be required way lesser documents.
That’s why it’s important to know what documents you have so that you know what kind of loan you can take out.
- Financial Covenants
There are several things that banks require when applying for a business loan compared to personal loans. An example of this is financial covenants.
Financial covenants are agreed upon financial ratios or other financial metrics that the borrower needs to meet every quarter or year, depending on the agreement between the lender and borrower.
If you’re a start-up, this might be more difficult to meet. However, if your business is already operational, then just take note of these ratios.
Now that you need to meet financial ratios, make sure that you prepare projections to make sure that you can stomach this business loan while being able to keep up with the financial ratios you agreed upon with the lender.
Loaning out money to a business, especially in its early stages, is very risky. For this reason, lenders will make every effort to reduce their risk. One of the ways of achieving lower risks is to secure the bank’s exposure by obtaining collateral.
Collateral are assets in the form of land, property, equipment, or chattel that can be taken by the lender in case the borrower defaults on payment. However, it’s important to note that your loan amount is not equal to the appraised value of the collateralized asset. Lenders will only loan a percentage of the appraised value of the collateralized asset and not the entire amount.
- Prepayment Penalties
One of the things that borrowers miss out is the prepayment penalty.
Prepayment penalties are fees charged by the lender if ever you pay for the loan before the maturity date. Lenders charge a prepayment penalty because lenders will earn lesser interest from the loan if you pay off the loan earlier. Prepayment penalty fees range from 2 to 3 percent.
Knowing this, you can negotiate with the bank or lender on waiving or significantly reducing the prepayment penalty. You want to remove this because you don’t know what will happen in the future.
It’ll be more advantageous for you to have the option to prepay the loan so that you’ll pay fewer interest fees, which will save you a lot of money in the long run.
There are many things to consider before taking out a business loan, and these are just some of the basic information you need to know.
The pointers above should guide you in judging if you should or can stomach taking out a business loan. Make sure you also look at all the terms and conditions of a loan before taking one out.