If you are just beginning your hunt for business financing, that is, this is your first time of trying to get a business loan then you are most likely knee-deep in unfamiliar terms. It is very important to understand lending terms before taking a business loan from any financial institution to avoid a scenario of drowning in an ocean. Unfavorable lending terms are enough to make even the most eager entrepreneur feel overwhelmed. Don’t continue your search without reviewing a few of the essential terms you need to know to make an informed decision about financing your business.
While some financial institutions will not tell you everything you need to know from the onset, if you know the right questions to ask, you would be saving yourself from a whole load of stress and uncertainties in cases of unrevealed charges. Here at Creditville, we are as transparent as possible with our process and there are no hidden charges.
What Are The Things I Should Know Before Taking Out A Loan For My Business
Business structure and Registration Status:
For a business loan, your business would be required to have a proper business structure, be registered with Corporate Affairs Commission and run a corporate account. Most financial institutions especially private lenders do not give loans to businesses whose income are not regular (Example Construction and real estate) and businesses that do not have physical offices. It is very important you understand that your business be structured before taking a business loan.
Know the lender’s interest rate and method of calculation. Interest rates are either calculated on the reducing balance interest rate method (RBB) or the Flat interest rate method. Knowing which category the lender falls into would help you decide.
With each financial institution or bank come different loan tenures. Some loan tenures may be favorable to your business while some may not be. You must know the duration of the loan and how favorable it is to your kind of business. Some financial institution would offer you as much as 5 years loan tenure while some others will offer you a maximum of 3 to 6 months on first borrowing. Subsequently, loan tenures can be elongated for customers who have proven to be creditworthy.
Creditworthiness and Cash flow:
The amount you get as loan is highly dependent on your credit worthiness as well as your cash flow. If your business is young and credit worthiness cannot be ascertained you would most likely get very little as a loan.
An income statement (statement of account) details your business’s net income, revenue and expenses for a specific period, such as quarterly or annually. Typically, most lenders ask for 6 months statement of account. Six months is enough to ascertain your business cash flow. It’s one of the most important components of your application.
Also, lenders review your statement to check the regularity and volume of your cash flow. The cost of running your business is then subtracted from the income to ascertain how much loan can be given to you. No financial institution will give you a business loan that they know would be impossible for you to payback. Hence the reason for credit checks and statement review.
Terms and conditions for the loan:
Business loans are different from personal loans, payday loans, and the likes. Business loans are usually more difficult to get and the process is usually a bit more stringent except in cases where you are either a returning borrower or you need a very small sum for your business. Consider the terms and conditions for getting the business loan. Loan insurance, guarantor class (in cases of guarantor loans), and collateral type (in cases of collateral loans). It is important that you know every term required to get a loan.
Would these terms and conditions be detrimental to your business if you hit a snag and are unable to pay back in due time? While some financial institutions might be a bit flexible and allow you to pay at your own pace but with the increased interest rate, some might not be. So before you borrow, before you sign the dotted lines of your agreement with the lender, be sure to confirm that you agree with everything contained in the agreement and can face the consequences if unforeseen circumstances arise
Will the repayment be done on a weekly basis, monthly, quarterly, biannually or annually? If they have various repayment options, go for the repayment plan that suits your business best. Tailor the repayment to the most profitable season of your business if possible. For financial institutions like Creditville Limited which require that you make monthly payments, you are allowed to choose a repayment day which should fall under the best time of the month for business.
Always request for a repayment schedule. Look at the repayment schedule critically. Analyze the figures to check if they add up.
Insurance policies and method of recovery
Most financial institutions go the extra mile to protect their money. Insurance is one way to attain this. Life insurance particularly so in case of loss of life, insurance would take the responsibility for paying your outstanding balance. In some cases, where there is no insurance, your business could take the fall in a case of loss of life.
Every financial institution has recovery practices. Without recovery strategy in place, they most likely would be running at a loss. How does this financial institution you want to borrow from handle recovery? Do they embarrass people who owe and their family members, would they shut down your business and continually harass you or would they be civil and try to follow up repayments in a civil matter? While you may not be planning on owing them, sometimes businesses can be unpredictable. You might not see the loss coming and when it hits you, it hits you bad. There could be a fall in demand or the economy could take a dive and your initial prediction and repayment plan would not work out.
Would the lender handle this situation with empathy or would they only care about their money? All these are lending terms that need to be looked into.
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