Top 7 points you should consider before pursuing a small business loan

Top 7 points you should consider before pursuing small business loan.pngEnhancing and moving your business to next stage is only the result of your sheer hard work, commitment and gaining customers loyalty. At this stage there will be millions of questions, plans, ideas , thoughts and deals that run in your brain right now. But, one point you ponder  – is your Financial position. Let me put in right terminology, it is the working capital that is needed right now that upgrades your business, in terms of – product features, infrastructure development, purchasing more equipment to meet more customer needs, arranging for a new dedicated office, developing brand penetration, launch marketing campaign and other related stuff. There are bunch of good Financial institutions that offer various solutions to meet your current financial situations.

7-points-you-should-consider-before-pursuing-a-small-biz-loan

1. Ask these questions :Before, pursuing loan for your Startup or small business, it is significant to observe and find answers to following questions:

  1. Firstly, decide on how much amount is required for the next level of business goals?
  2. What type of loan you will need to cater your business needs?
  3.  How long will you need it ?
  4. Will your business has the capacity to repay the loan, interest and any one-off or on-going fees that come with the loan in future?
  5. What security you are ready to offer to the lender and how it affects your interest rate?

2.Always do check the following risk factors of your Startup or Small business:

  1. Financial, Business management and market risks
  2. Lack of Collateral or security
  3. Business growth history
  4. Industry sector barriers (entry and exit)
  5. Current micro and macro economic conditions
  6. Type of industry sector – factors that affect the levels of competition of your product, profitability growth
  7. Planning capability, product knowledge and finance skills – of your business
  8. To check your credit rating and assess your repayment capacity of loans

3.What type of funds to access: 

Semi-regular basis: It is applicable when your business need a cashflow to continue its operation while waiting for your customers to pay for goods, it is, where, at-call loans come into picture, such as – overdraft or line of credit created for this purpose.

Up-front basis: It is one-time payment solution provided to set-up a new venture or buy a new equipment.

Loan Terms: Your loan repayment is a total of actual loan plus interest on the loan. The repayment amount is proportional to the term period of loan repayment. Always, calculate the amount that is to be repaid after fixing the amount of working capital ,you would need, using financial calculators available online. Remember,the more number of years you choose to repay the more interest burden you’re  holding .

4.What other channels you can fund for ongoing expenses?

Overdraft or Line of credit is your another channel to get funds that cover your one-time expenses and fund ongoing expenses. This feature allows you to draw more than the amount in your checking amount, for which you’ll pay the interest on the overdraft amount. Fees charged is  -sometimes at each overdraft you draw; or annual fees. However, it contains inherently high interest rate associated with these type of loans.

5.If it is fixed or variable interest rate you want:

Fixed interest rate: It’s your interest rate that is fixed and you only pay fixed instalments through out your loan term.Further, fixed interest rate feature avoids any interest rate risks proportional to benchmark interest rate which is its merit.  And, its demerit is higher introductory interest rates compared to lower interest rate offered by variable rates or floating interest rates.

Benchmark interest rate explained: It is the base rate or prime rate that a central or Federal bank of a country determines a rate, which is charged by banks while lending loans and advances to its consumers (across various types of loans offered by individual banks), which controls the demand and supply of  nation’s currency and inflation of the economy. This base rate fluctuation does impact prime interest rates offered to consumers.

Variable interest rate: Clearly, it is the interest rate that fluctuates (over a period of time) in proportional to benchmark index or interest rates that change periodically. Its merit lies in its lower interest rates available once benchmark index rates fall and thus reflect on your repayments monthly. Conversely, it is same when base rate raises and interest rates certainly increase.

6.Security or Collateral backed by your assets: Banks do scrutinise the type of asset or property, you provide as security against borrowed amount. It is essential to classify your assets as secured or unsecured with your Financial advisor or Bank manager initially. A lender always seeks safest collateral backed by a consumer credibility, which mitigates the risk of default.

7.Fees or costs associated to your loan: There are additional costs or fees linked to process your loan application, like – credit score check, property or asset appraisal and basic administrative fees, establishment/application fees, exit/discharge fees. Next, research for business loan finder tools or lending fees and charges guide by particular financial institution to find more about set-up fees and ongoing fees associated to your monthly instalments.

More points to be considered: 

  1. Always seek advice from your accountant or financial planner before pursuing funds from financial institutions
  2. It is very significant to prepare your project proposal followed by an in-depth research and document appropriate profit and loss statement, cashflow projections (past,present and future). Lenders analyse your project with all adequate inputs put forward and reflect their decision which is ,indeed, dependent on your business potential , credit score, your business market share, customer base and more.
  3. Lenders do risk assessment – It is the level and  nature of security you’re offering to support your loan; your ability to repay loan regularly; and ability to repay total debt apart from other outstanding debts that to be paid. For which, there will be great emphasise focused on cashflow projections, as it shows cash remained after total expenses, which is an indicator of repaying capacity produced from your business.

From my recent research, I found that Entrepreneur media is extending its small business loan powered by CAN capital which is available to US businesses only ( Businesses in these states are not applicable for lending -CT, DE, MI, MN, MT, ND, NV, NJ, NY, RI, SD, TN and VT.California: loans made or arranged pursuant to a California Finance Lenders Law license by CAN Capital Asset Servicing, Inc. )   . CAN capital is the exclusive business finance provider for Entrepreneur media Lending.

There are three types of working capital loans available from CAN Capital – 1. Term Loan 2. TrakLoan  3. Instalment Loan

Term Loan : Term loan payment is not dependent on your fluctuated revenue where you get regular payments. And your business can use Term loan for- Inventory, Equipment, Taxes, Technology upgrade, expansion, renovation, payroll, marketing and staffing.

  • Funding amount : $2,500 – $150,000 amount per location
  • Payments method : Low fixed Daily
  • Loan Tenure: 3 – 36 months
  • Owner Credit rating: Fair to Excellent

TrakLoan: Trakloan payments are dependent on daily revenue percentage of your business. Your business can apply Trakloan for – Inventory, Equipment, Technology upgrade, Expansion, Payroll,marketing, Taxes, renovation and staffing.

  • Funding amount : $2,500 – $150,000 amount per location
  • Payments method : Low flexible Daily
  • Loan Tenure: 3 – 36 months Estimated term
  • Owner Credit rating: Fair to Excellent

Note: Estimated term is the period of time estimated, at underwriting, that it will take to collect the total repayment amount of the loan. TrakLoan term can only be an estimate because the dollar amount paid on the loan on any given day fluctuates with the business’ fluctuating card sales volumes, and Trakloan has no set term, maturity date or fixed or minimum payment amounts.

Instalment Loan: Your monthly payments are fixed which is independent to your business revenue. Your business can use Instalment loan for – Inventory, Technology upgrade, payroll, equipment, Expansion, Marketing, Renovation, Taxes and Staffing,

  • Funding amount : $50,000 – $100,000 amount per location
  • Payments method : Fixed monthly
  • Loan Tenure: 24, 36 or 48 months
  • Owner Credit rating: Good to Excellent

Credit Rating: They consider business owners with a FICO® credit score of at least 680 to have good credit. The FICO® credit score is based on data from Experian, Equifax and/or TransUnion and may be different from other credit scores. FICO is a registered trademark of the Fair Isaac Corporation.

In crux, it is important to have knowledge and reasearch on the type of loan you want to seek and know in-depth about all factors considering the loan.

So, let me know other types of loans offered by any leading financial institutions. And don’t forget to share this article which might be helpful to someone somewhere  in this world.

@startupsformula– Learn, Share and Grow 

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