As rewarding as it may be, managing your own company comes with many challenges, some of which may spell the end of your entrepreneurial dreams if you fail to prepare and deal with them effectively. A staggering percentage of businesses end up closing their doors due to a lack of funds, but this doesn’t necessarily have to be the case. Business owners can overcome many financial challenges and get the funds they need to cover immediate needs, grow their venture, consolidate high-interest debt, or boost their cash flow with the right business loan – at a price, of course! To help you find an affordable business loan with reasonable terms, here are three of the most important things you should know about this type of credit.
1. Your Personal Credit History Affects Your Borrowing Power
Borrowing power is a term lenders use to assess your ability to pay back a loan and determine how much money they can offer you based on your financial situation. Even if you’re applying for a small business loan, your personal credit history as the business owner will affect your borrowing power. Before applying for a loan, you need to analyze your personal financial profile and credit score. If your credit score is in the 600’s range or below, you might want to work on improving it first to boost your borrowing power.
If you have an insufficient credit history, you can simply take out a small personal loan or make small purchases on your credit card. It might seem counterintuitive at first, but making timely payments over the course of a few months will demonstrate to the lenders and credit rating agencies that you are able and willing to pay back debt in a responsible manner, which will reflect positively on your credit score.
2. There are Different Types of Lenders to Consider
There are different types of lenders out there, each with its own conditions and requirements on how the money can be used and when it must be repaid. First off, you have the US Small Business Administration (SBA), which offers various loan programs to a wide range of businesses. While SBA loan terms tend to be more favorable to borrowers, they come with stringent requirements, additional paperwork, and extra fees, and they take longer to get approved. Next, you have conventional banks that usually offer lower interest rates and a faster approval process for those with a strong credit history. However, these loans come with a shorter repayment time than SBA loans and often include a balloon payment.
Last but not least, you have alternative lenders who typically have much less stringent requirements than the SBA or conventional banks, making them quite convenient for business owners with a less-than-stellar credit history. They usually offer online applications and provide funding within five days of approval. However, since they often deal with high-risk borrowers, alternative lenders charge significantly higher interest rates than banks to offset the risk. There’s a lot at stake here, so take advice from the Singapore-based lenders at www.bugiscredit.sg, and thoroughly research the lender you’re considering to avoid scammers. To ensure that you’re entering into an agreement that makes sense financially for your business, carefully go over the fine print of the loan and make sure you fully understand the terms and conditions.
3. The Cost of Borrowing Money Goes Beyond Interest Rates
Interest rates aren’t the only expense you have to consider when borrowing money. Some banks will ask you to pay a percentage fee to keep a line of credit open, even if you won’t use that credit. Other banks will require that you keep an offset account when you take out a loan, which means that your effective interest rate will be higher than the actual interest rate you had initially signed up for because you can’t use all the money you borrowed. With that in mind, it would be wise to choose a lender who won’t have you jump through hoops to access the funds you need should you experience a temporary downturn or an unexpected emergency, even if they don’t offer the lowest interest rates out there.
A business loan can provide you with the funds you need to keep your operations running and pursue further growth, but it’s not without its risks. To keep your credit score from falling, reduce the extra costs, and avoid losing your collateral, you need to pay the loan off as soon as possible. Remember, loans are simply a means to an end; they can temporarily boost your cash flow or help you pay for expensive equipment, but they won’t magically solve your financial problems. To keep your company afloat, you need solid, long- and short-term financial planning.