Business loans are the lifeline of the business world. Taking a business loan doesn’t necessarily mean that you are in a bad financial position and that you need more money. Instead, it means that you need a capital injection and that you don’t want to burn the cash that you have available. Instead, you are looking for an additional form of funding. The business loan is a common method you can use in order to avoid looking for a partner or selling equity in your firm. Before you proceed, there are two questions you need to answer. First, how much money can you borrow? Second, how much should you borrow? Let’s check this one out.
1. Estimate your business needs
The first thing you need to do is figure out how much money you actually need. Being optimistic is usually not the way to go here. Why? First of all, your business needs will probably exceed your most optimistic estimates. Keep in mind that if things go better than planned, you won’t actually have a problem, while if things go worse, it will be up to you to figure out how to cover the patch. In other words, you need to have a contingency plan and prepare for the worst of outcomes. Once you have the final figure, you can proceed to the next step.
2. Consult loan repayment calculator
The most important thing you need to understand when trying to figure out how much you can borrow, is to see how much your monthly payment will be. The simplest way to do so is to consult the loan repayment calculator. You can also do this on your own. Now, add this figure to your current list of expenses. This way, you will update it. Once you have this new list of expenses, you need to be realistic about your ability to pay it back. Keep in mind that it will take months and years to pay it all back, so prepare for changing conditions and circumstances.
3. Look at available lenders
The maximum loan amount will depend on the lender. There are two types of platforms out there – direct lenders and P2P platforms. With P2P platforms, the APR, origination fee, minimum credit score requirement, etc. depends on the lender. With direct lenders, it’s easy to predict the loan terms. In any case, it’s always for the best to look for commercial business loan specialists. This way, you can hope for the best possible terms. Moreover, business loan requirements are much different than personal loan requirements, which is why you need someone who understands your specific circumstances.
4. Loan profitability
Ideally, the money that you would borrow would lead to an increase in the profitability of your enterprise and the growth of your business. If this is the case, the increase gained through the loan should surpass the monthly payments that you would have to make. In this scenario, the idea of getting a business loan is an excellent one and by comparing these two figures, you can understand just how great this would be for your enterprise.
5. Future loans
You also need to understand that this is probably not the last loan that your enterprise will ever need. In fact, chances are that you will need the next loan before long. Add this to your personal calculations before committing to any particular lender. Sometimes, getting a loan can help you build a credit history. This means that it will become a lot easier for you to get a new loan in the future. Overall, if you’re responsible enough with your regular credit payments, your credit score should grow. Still, keep in mind that additional loans mean additional monthly payments.
6. Shop around
Another thing you need to keep in mind is the importance of shopping around when looking for a loan. Even with the same credit score, collateral (if it’s a secured loan that we’re talking about), and loan amount, you can get different loan terms with different lenders. Just make sure that the pre-qualification process asks for a soft credit inquiry before committing. Every hard credit pull can cost you up to 5 points on your credit score. This really isn’t much but repeat it several times and it can add up.
In conclusion
At the end of the day, there are two things you need to know before borrowing money for your business. The first one is the needs of your business. Try to make financial projections of your future profits and the impact that the loan will have on your ability to make a profit. The second thing is the very nature of loans. Things like credit score, collateral, APR, and average loan term duration are something that you need to get familiar with. By shopping around, you will have a much easier job at recognizing a good deal and getting better terms.