Business loans are instruments of opportunity, survival, and expansion when used strategically.
To a new company looking for working capital or an established business looking to expand, the ideal loan at the ideal moment can be the difference between prosperity and catastrophe.
Loans aren’t risk-free, however. Familiarity with the ins and outs of business loans can mean wiser choices and fewer costly blunders. With that said, here are five fundamental loan facts that every business owner should know before signing up for one.
- Not All Loans Are Created Equal
Many types of business loans exist. But the best one for your company depends on your specific needs and objectives. Some of the most common ones include:
- Term Loans: Large upfront payments to be repaid over time in installments.
- Lines of Credit: Revolving line of credit such as a credit card.
- SBA Loans: Government-backed loans with good terms.
- Invoice Financing: Short-term financing against your outstanding invoices.
- Merchant Cash Advances: Loans based on a percentage of future sales.
Find a business loan provider offering the types of loans that fit what you want. You can get the nitty-gritty about the pros and cons of each based on your specific requirements.
- Your Credit Profile Matters
When applying for a business loan, lenders will typically look at your business credit and your personal credit. That’s especially true for new businesses or small businesses.
If your company has minimal credit history, your individual credit score is that much more important. Lenders will factor into their decision things like your credit score, debt-to-income ratio, credit history, and any bankruptcy history.
Having a good credit history improves your chances of being accepted and being offered good terms and interest rates.
- Cash Flow Is Just as Important as Credit
Your company will have to demonstrate that it can service operational costs as well as repay a loan. Lenders will generally consider monthly income, net profit margins, bank statements, and debt service coverage ratios.
A steady, solid cash flow shows lenders that your company will have the ability to repay loans. If your cash flow is poor or declining, it might be best to delay borrowing or seek alternative sources of funds like grants or equity financing.
- Loan Terms Can Make or Break Your Finances
Don’t sign a business loan unless you understand the loan terms and know you can abide by those terms.
On the one hand, short-term loans offer quick cash but lofty payback requirements that can disrupt your cash flow. On the other hand, long-term loans minimize payments, but your business will pay more interest in the long term. Match your revenues and expenses to determine what payoff period you can afford.
- Borrowing Should Be Strategic
You don’t want to borrow just for the sake of borrowing. That will lead to disaster. Instead, you need to be strategic and understand why you are borrowing.
And remember, just because you qualify for a specific amount doesn’t always mean you need to borrow the entire amount.
Business loans are useful tools if properly utilized. Knowing about different kinds of loans, having good credit, and reading loan agreements carefully will help you make reasonable decisions that can help your company get ahead.
By discovering what you’re getting yourself into — and planning ahead for how you’ll spend the money smartly — you can employ business loans not only to get you through bad times but also to build a more competitive company.
Don’t just think about what a loan will do for your business in the short run — think about how it can potentially help you down the road.
