Need a loan for your new business? Seven things to keep in mind
When you start your first business, it's unlikely that you'll have enough personal capital to get it going on your own. You'll need to pay for equipment, office space, and workers before you start generating revenue - and those are likely only the beginning of your expenses. There are many ways to gather additional capital
, including angel investors, venture capitalists, crowdfunding, or even asking your friends and relatives. Many business owners eventually settle on seeking a small business loan, but there are multiple considerations you'll need to bear in mind before going that route.
11 Apr 2017 10:56 What to consider in a small business loan
These should be the first questions you ask yourself before following through on that loan:
How to move forward
- What is your credit like? Before you start looking for a small business loan, consider what your personal credit is like. If you already have a business, your business credit will come into play, but most first-time lenders will also be first-time entrepreneurs - which means your personal credit history will be a deciding factor in how much banks are willing to lend you (and under what conditions). If your credit score isn’t in good standing, you may need to spend some time repairing your credit before proceeding.
- What kind of loan do you want to get? Trying to get a “business loan” is like trying to order a “soft drink.” There are actually many different types of loans available, and each one comes with different stipulations and requirements. Installment loans, for example, are common and mandate monthly payments (of equal amounts) that cover both the principal and interest. A balloon loan, by contrast, only mandates payments on the interest of the loan, while the full sum of the principal is due at a later date.
- What are the terms and conditions? Like with any loan, you’ll need to pay careful attention to the terms and conditions, some of which will be more favorable to you than others. The interest rate is obviously a major consideration, since it will determine how much additional money you pay back on the principal, but how frequently it compounds could also affect that figure. The length of the loan, the frequency of payments, and the method of payments are also important considerations.
- What’s the probability of your business failing? It’s commonly cited that 90 percent of businesses fail within the first few years, but 50% is a more accurate figure - and that’s still a significant chance that your business isn’t going to survive long enough for you to pay back your loans. You need to do heavy financial and market research to understand exactly what your business’s chances of survival are; if you’re concerned about your chances, a significant loan may not be in your best interest.
- What will happen if your business fails? Two main categories of loans exist: secured loans and unsecured loans. Secured loans have the principal of the loan “secured” with some kind of collateral; this may include equipment your business is currently using or personal property like your house and/or vehicle. If your business fails and you find yourself unable to pay the loan back, what will happen? Will your financial institution be able to collect that collateral? Will they be able to hold you personally liable for the remaining sum?
- How are you going to use the money? If you’re shopping for a loan so you have more financial freedom with your business, you’re doing something wrong. You need to have a strict, sensible budget in place, and a precise understanding of how you’re going to use the money once you’ve acquired it. Lenders will want to see this information, and it will help you use the money responsibly—ensuring you won’t get into a position where you can’t pay it back.
- How are you planning to pay the money back? Speaking of payments, you’ll need to have a plan for how to generate revenue in time to start paying your loan back. Your first goal should be establishing a stream of revenue so you can cover your operating expenses and start chipping away at that standing debt.
Once you’re able to answer these questions confidently, you’ll be able to start shopping to different loan providers. Depending on your credit history and your business pitch, you may be able to score better terms and conditions
. You’ll see some slight variance between financial providers, so try to end up with the best possible deal for your business’s future. Someday, you may need an additional loan or an ongoing line of credit - so establish a good relationship with your financial institution of choice.