Nobody wants to borrow money, but sometimes it has to be done and a business loan is often the quickest and simplest way to inject new financing into your company. But is it a good choice? Let’s take a look at some of the things worth thinking about if your considering such a move.
Simplicity – Applying for one can be very easy, especially if you have a good relationship with your bank. If you’re business shows promise, or is a successful business and you’re looking to expand, things should also be quite simple. It is worth noting that you shouldn’t just accept the first loan offer you receive. Make sure you shop around and get the best deal, because at the end of the days it’s just common sense.
Disclosure – One downside is that anyone wanting to loan you money will want to see your books and recent financial reports. They need this information to see not only how you’ll use the loan, but also how you’ll pay it back, so be honest and accurate when you supply it. I’m sure that you don’t run a dodgy business, so this shouldn’t be a problem. If you are running a dodgy business, stop immediately.
Interest Rates – When you look into different business loans, make sure you’re aware of what interest rate you’re paying on it, and how long you’ll have to pay it off. It’s also worth noting what the possibilities are for paying it off early or extending it, to prepare for if your business goes up or down. Ideally you want to pay it off as quickly as possible so that you can forget about it. Not paying loans off can have serious, serious consequences.
Investment – If you’re looking to dramatically expand your business or need a lot of capital for a long-term project, then a business loan may not be the right option for you. There may be much more benefit in finding a person or company willing to invest in your business instead. This will give you a much more active partnership with your investor, and they’ll often expect repayments on a much longer timescale than you’d have with a loan.
Taxes – One advantage of a loan is that the repayments on it are a business expense (unlike payments to investors) and so can be deducted as an expense from your profits before taxes have to be paid on them.
Security – You can get a better interest rate if you take out a secured loan, where you guarantee the repayments against something. For instance, an entrepreneur may secure a loan against his house, a large business may do so against a piece of machinery. However, while the repayments will be less, if you can’t keep up the repayments, you may have to surrender what you’ve secured the loan against.
That’s just a couple of things that you have to consider when looking at business loans. Most of them are common sense, but you’ll be surprised how many times you forget the simple thing. I know I do.Image Courtesy: freedigitalphotos.net