Taking out a business loan is one of the most important decisions you can make as a new entrepreneur. It’s an investment in your future and gives you access to capital that can help you grow your business and achieve your goals. But how do you know if taking out a business loan is right for your company? Here are some things to consider first before doing so.
1. Credit score and financial history
What is a good credit score for business financing?
The answer depends on the lender and their particular requirements. But in general, a good credit score is considered to be at least 650. If your score is below this, you may have difficulty getting approved for a business loan. It’s also worth noting that 650 is not an exceptional credit score—it falls into the “fair” category. However, you can apply for a business loan if you have strong financial documents supporting your ability to repay the loan.
Do loan companies check your income?
Yes. Lenders want to know that you have an adequate income to cover your expenses and repay your loan. They also want to see that you have a history of managing money effectively, so they can predict how well you’ll manage other funds in the future. Lenders may ask for proof that you have savings or other assets available for emergencies or unexpected expenses if there’s a gap between your income and expenses.
Is a good credit score necessary for a business loan?
Lenders consider your credit score when deciding whether to approve your loan and what interest rate to charge. A good credit score can also help you save money on interest rates. The higher your score, the better terms lenders offer you. So, for instance, you want to take out a loan to build a business location in your oak storage space, or maybe you want to refinance your current business location. If you have good credit, you can likely secure a loan with a lower interest rate and better terms than if your credit is bad.
2. Collateral or guarantees
What type of loan is guaranteed by collateral?
When you borrow money against a valuable asset, such as a car or home, the lender may ask you to pledge that property as collateral. The lender’s right to sell your car or house if you don’t repay the loan is called “possession.” Collateral may also be called a security interest. What type of loan is not guaranteed by collateral? If you’re applying for an unsecured loan — meaning there’s no collateral involved — lenders will want to see other evidence of your ability to repay the debt.
What kind of assets can be used as collateral?
Any property can be used as collateral, including automobiles, boats, and real estate. If you’re applying for a loan against your home, lenders usually require a down payment or equity in the property to ensure you have some financial skin in the game.
How does a loan guarantee work?
A loan guarantee is a form of insurance that protects the lender against default. The guarantor assumes responsibility for the loan in case you can’t make payments. If you default on your debt, the guarantor pays off the lender and takes ownership of your property.
3. Cost of borrowing
What is the cost charged for borrowing money?
The lender will charge a fee for issuing the loan, which may be paid in one lump sum or added to your balance. The interest rate is often quoted as an annual percentage rate (APR), which includes both the principal and any fees incurred during the life of the loan.
What is the average interest rate for a business loan?
The average interest rate for a business loan is between 3 to 6%, although this figure may vary based on the lender and the type of loan. Smaller loans with lower risk profiles tend to have lower rates than larger loans with higher risk profiles.
4. Repayment
What is the repayment period for a business loan?
Short-term loans are generally repaid within 1.5 years of being issued. Medium-term loans can last anywhere from one to five years, while long-term loans tend to be repaid over more extended periods for up to 25 years. The repayment for your business loan varies based on the type of loan, lender, and your personal financial situation.
Can you pay back a business loan early?
Some loans come with interest from the moment you take out the loan, which means that if you don’t pay it off quickly enough, your total debt will grow. Other loans may charge a prepayment penalty on the amount of principal you pay off early. This is because the lender is losing out on interest they could have made off the loan, and they’re unhappy about it. In these cases, your best bet is to negotiate with the lender before you make an early payment.
Conclusion
Business loans can be a great way to help your business grow, and they’re available from various lenders. Before you apply for one, make sure you understand how much money you need and why. Then you can compare loans to find the best one that suits your needs and budget.