What To Consider Before Taking Out A Small Business Loan

Small business owners may make every effort to fund their business themselves.

Still, sometimes, they will need a loan to help them expand the business or manage operational costs when the company is unstable and not delivering financially. 

Small businesses have fewer options than large corporations with easy access to funding. Since some loans require personal guarantees, the business owner may sometimes need to put their personal assets at risk. For these reasons, borrowing money as a small business owner is a serious decision that must be carefully thought through. 

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Before applying for a loan, business owners must consider the following:

The Amount of Money You Need

Determining the amount of money you need is the first step. It isn't always possible to pinpoint precisely how much you need, but try to be realistic and include any upcoming expenses you may have. Applying for too little will mean you’ll be short and then have to apply for more funding, wasting time and slowing down your processes. Applying for too much money sticks you with paying unnecessary interest. 

How Soon You Need the Funds

With most things, planning gives you more options and more time to find a loan that best suits you. If you know you’ll need money in the upcoming months, it’s best to start researching and applying for a loan a few months before. Some loans take longer to approve but may have more favorable terms.

If you need a loan in an emergency, you may have fewer options and be forced to take a loan with high interest and less favorable terms.

Lender Options

Small businesses are not always eligible for business loans from traditional lenders like banks. Conventional lenders usually require a small business to be financially stable and in operation for at least a year before providing funding.

However, other lenders like government programs, non-profits, and smaller community banks offer loans specifically designed for small businesses. 

Loan Options

There are various loan options for small businesses, so shop around and select the one that best suits your needs. Popular loans include:

• SBA Loans

SBA loans are ideal for small businesses that only require a small amount and don't qualify for a traditional loan. The average loan is around $13,000 and cannot exceed $50,000. The government backs these loans, but you’ll need to apply through a lending institution. 

• Business Line of Credit

Like a credit card, a business line of credit allows you to borrow money from the line of credit only when you need to and you only pay interest on the amount of money you use. When you repay the borrowed money, the line of credit is replenished so that you have revolving credit whenever you need it. 

• Personal Loans

Personal loans are versatile, so you can use them for anything, including funding your business. A personal business loan might be a good option if you've got a good credit score. 

Many personal loans are available, each with different interest rates and terms that can vary by state. For example, the rate you’ll get for personal loans Kansas City will be different from the rate you’ll get for the same or similar loan in New York. 

Pay Attention to the Terms

When you receive loan offers, read the terms carefully and compare them. Pay attention to the fees and interest, and be sure you can afford to pay them. Also, look at the payment period and how much time you have to pay them. 

Some lenders require monthly installments, while others may require that you pay a lump sum. Only sign a loan agreement if you’re comfortable with the terms and confident you can manage the repayments.

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