So before you decide to get a loan, you have to be sure you're making the best choice for your business. There are many options available for small businesses who need some extra finance, whether be it an action growth in a business plan, or you want to get through a cash flow issue, or get over an unexpected expense or event. But regardless of what that is, you still need to be mindful of this decision.
Here are 6 major considerations before getting loan/finance for your small business.
1. Be clear about the purpose of the finance/loan
Before jumping into the details on the types of loans offered and what loan makes the most sense for your business, take time to assess your current needs. Your first consideration should be how much money you need and for how long. Let's say, you are an established business that needs to cover sudden expenses; short-term financing is what you’re after. It could be either secured or unsecured and you’ll need to repay promptly. This sort of financing would be too risky perhaps to use for longer term major investments.
2. Determine how much funding you require
Once you’ve decided and wholly justified that you really need a loan, the next thing to do is determine how much funding your business needs. It is common for businesses to underestimate the costs they need to cover and the length of time. You have to consider that it’s important to be realistic and cautious about how much you need, especially taking out a larger loan than you need. Interest will be costly and repayment will definitely be hard for your business to cope with if the expected revenue does not eventuate.
3. Calculate repayments
Take the necessary time to ‘think and process’, the impact that loan repayments will have on your cash flow. How much can you afford to repay per month? Try to compare interest rates on various options and consider whether you have the adequate cash flow to fund that option. You also have to consider that interest rates vary depending on the type of finance or your personal and business loan history. You can calculate repayments and interest amounts here or consult the table below for a quick comparison of interest rates.
4. Read terms and conditions
Remember to look and thoroughly read at all the terms, conditions, and agreements of the loan to assess what it will truly cost you. Always and always make sure you understand what you’re signing. It’s not just a matter of repayments, but additional fees such as set up and administration, which can really add up. It is also important to consider monthly “account fees”. Moreover, ask yourself if you have any assets which you could offer as security for a loan. If not, you’re going to have to go for an unsecured option. The unsecured option is generally more expensive.
5. Consider the industry you are in
There are actually loan options that are only available to certain types of businesses. So it would be best to be cautious particularly those relevant for your field or purpose. For example, merchant cash advances are only an option for retailers and hospitality businesses. Try to consider and look for a wide range of finance options if you’re specifically looking to pay for equipment.
6. Look for alternatives as much as possible
Lastly, try to look for alternatives and consider backup plans if need be. At the present, there are a variety of sources from which to seek funding. Traditional institutions, such as banks and credit unions, have long provided a needed influx of cash to the small business owner.
The key to successful leveraging for your business via purchasing funds (taking out a loan), is the cash flow planning beforehand. If you need assistance with this, CSA can help you get your business administration organised for up to date reporting and management.