What To Consider When Taking Out A Business Loan

A business loan is a financing option used to support different operational functions. You can use the credit to support business expenses to help contribute to the establishment, growth, and maintenance of your company. You may also choose to take out a loan as opposed to gaining investors. Here are the four things to consider if you’re looking to take out a business loan:

1. Credit History

The first item reviewed by the lending corporation is the credit history of everyone involved in the establishment of the company. Lenders would typically check the credit scores and accounts of the individuals who have shares higher than 20% of the business. Any person in the core staff of the organization with a low credit score may result in a decline of the loan request.

It’s essential to be familiar with the credit report of the company’s major shareholders for the approval of a start up business loan. Specific online portals exist for you and your colleagues to get a copy of your credit reports. Contact credit bureaus if there are any errors seen, and don’t forget to bring written documentation for it to act as substantial proof.

Aside from the credit scores of the business owners and its significant shareholders, lenders may also check the following during the initial review process:

1. Type of business
2. Type of collateral
3. Size of business
4. Industry
5. Time in business
6. Loan to Value Ratio

Different industries have varying business requirements. Individual companies may have more common financing needs in comparison with others. For example, the US retail sales growth for March 2019 shows varying growth rates depending on the product category.

2. Loan Cost

Lenders may describe the loan cost using different descriptions. One financing corporation may describe the loan cost as the total amount of money to pay back. Another lender may tell you it’s the loan’s interest rate. Instead of asking for the loan’s charges, ask your preferred lender to inform you of the Annual Percentage Rate (APR).

APR is the total loan cost for one year. The charge will include all the fees, and it ranges from 6% to 9%. A low APR in business loans doesn’t necessarily mean the financing option is better than a business credit with high APR

Short-term business loans may have high APRs. Still, since you’ll pay off the additional financing quickly, the credit won’t accumulate a significant interest over time. The resulting total amount for the payment is relatively low as compared to paying off a long-term loan with low APR.

3. Income

A determining factor for loan approval is the borrower’s ability to pay back the borrowed amount of money. Provide income statements at the beginning of the loan application to gain a better chance of approval. You can also show a record of your earnings like a banking statement for a specific period. The documents should display a history of good earnings if you require a significant amount of cash for the business loan.

Several lending corporations will have breakpoints that list the increase of financial statements. These breakpoints may include:

1. A one year personal and business tax return for loans up to USD 100,000.
2. Two to three years of personal and business tax returns for loans over USD 100,000. Lenders may also require a current balance sheet, personal financial statements of all principles, year-to-date (YTD) interim financial statements, and aging reports.

Lenders will analyze these documents to show if the principles can pay off the business loan within the allotted period. These files may also support the request for additional investments in the future.

4. Prepayment Penalties

First-time borrowers may find prepayment penalties as a surprise. These charges are fees that lenders state if borrowers decide to pay off the debt at an earlier date. The act aims to reduce the total amount of interest earned by the lender. This fee is approximately 2% to 3% of the balance remaining in the loan. Specific lenders may also charge early payers with a sliding scale, which means the charges are higher if you pay earlier.

Individual lending companies may not have prepayment penalties. Negotiate with your preferred lending institution for the removal of these charges or a reduction of the penalty. If the prepayment penalties are non-negotiable, make sure to read all the fine print in the contract before affixing your signature.

Take note of the important business loan requirements to prepare you for the application process. Discuss your business’ lending needs with an advisor or banking firm before you make decisions.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.