Most businesses will start looking into loans eventually, especially startups and small businesses. It could be to fund a new project. It could simply be to protect the business. Whatever the reason, these are the things you need to know before you head down this road.
Know your rights!
Sometimes, it may not seem like the law looks out for you very much when you’re borrowing money. All you hear about in these kinds of situations is how hard the law will come down on you if you don’t eventually pay up. Well, a loan is like many other business exchanges.
There are laws that have been set to protect both parties. As a borrower, you have specific rights that you should know about before entering into a loan agreement. The type of business you run may affect what rights you have. The lender you work with is obligated to tell you all of these rights upfront!
Judging how much you should borrow
Finding out how much you should borrow for your small business really boils down to two questions. One: how much do you need? (That’s an obvious one, really.) And two: how much can you afford? It may seem odd to talk about “affording a loan”, as you’re applying for a loan because you don’t have much capital yet! But remember that over time you’re going to be paying it back. The more you borrow, the more you’ll have to pay back over time, often at a monthly rate. It’s that monthly interest rate you need to look out for!
Understanding the type of loan you’re going for
Just as there are many types of personal loan, there are also several types of business loan. It’s not usually as simple as having a bank lend you a certain amount upfront which you’ll start paying back monthly.
You’ve got a hard money equity loan, working capital loans, equipment financing… there are a lot! You should start by comparing traditional and nontraditional loan types. Find out about traditional term loans first.
Offering something as security or collateral
Of course, with most loan arrangements you’ll need to arrange assets to be considered as security or collateral. Basically, these are the assets that you will be placing in direct risk should you be unable to make the payments are agreed.
The risk? Well, the biggest risk is that those assets could be taken from you in order to make up for the missing payment. Research loan collateral well. And make sure you don’t put up anything as collateral that would see your business crumble if it were to be taken away.
Your business has a credit score too
People don’t often think of businesses as things that have their own credit score. We usually only think of individuals having credit scores. But a business loan will probably be given to you on the strength of both your individual and your business credit score. You might want to get a credit report for your business before you start applying for a loan. That way, you can start making corrections if your score comes back too low.