The Dos and Don’ts of Getting a Loan for Your Small Business
When you’re a small business owner, every dollar counts. Funding expenses and streamlining an unpredictable cash flow are often challenging, and sometimes, you’ll need a little outside help.
Most people automatically turn to loans to get them through a rough patch. This might work for your personal expenses, but in your business, there are some things to be cautious about before you take out a long-term loan.
To ensure you’re getting the best financial solution for your individual needs, follow these dos and don’ts of loan shopping.
1. Don’t Wait Until It’s Too Late
We get that it can be hard to predict when you’re going to have a cash flow crunch. Staying on top of your finances makes you more aware of potential expenses and problems, though.
For instance, if you know you want to expand your business or there’s a massive end-of-the-year sale coming up, you know you’ll need some extra cash.
Instead of adopting a “let’s wait and see what comes in” attitude, go ahead and start searching for finance options early. That way, you’ll have more time to find the best interest rates and terms.
2. Do Look At the Whole Picture
As you’re looking over the potential lenders who are willing to approve your loan, be aware of all the terms. Yes, the interest rate is important, but there are other factors you should compare, too.
What are the repayment terms? What kind of fees are involved? Is there an early payoff penalty?
Consider the assets you’re using to secure the loan if any. Unexpected expenses could come up that cause you to miss a few payments. If the lender seizes your collateral, can you afford to lose it and still run your business?
All of these factors make up the big picture of the loan. Interest rates are a vital part of it, yet they’re not the only thing to evaluate.
3. Don’t Take Out More Than You Need
You may run into lenders who are willing to finance you for more than you’re asking. It’s tempting to have that surplus cash on hand, but it’s not necessary. In the end, you’re paying interest and fees on money you didn’t really need.
The higher the amount you borrow, the bigger your monthly payments will be, too. Be careful not to get caught up in the exhilaration of how you could be spending all that money, and focus on exactly what you need instead.
As you budget for the actual expenses, you get a better idea of the kind of financing options to look into, as well. The projected figure may open you up to other kinds of lending solutions.
This article by Now explains how to figure out your working capital needs and decide if you truly need a loan. It’s possible that making a few tweaks in your processes or using accelerated invoicing options could save you from another long-term monthly debt.
4. Do Shop Around
If you’ve had trouble getting loans in the past because of your business’s financial situation, you might assume you can’t get the best rates. This leads you to think you have to accept the first lender willing to finance you.
It doesn’t hurt to shop around, though. Check with your bank or the Small Business Administration if you’re not in a rush. These traditional routes take longer and require more paperwork, but they typically give the best repayment terms.
If you’re trying to fund something specific, there could be a grant available that you won’t have to pay back.
Assuming you need a loan before you’ve looked into the alternatives can be an expensive mistake. When you have time because you didn’t wait until the last minute, you could save thousands of dollars.
It’s a common problem for thousands of small business owners to find themselves in need of extra working capital. Whatever the reason is that you’re considering a loan, be sure to follow these dos and don’ts before you agree to any lending solution.