A lot of entrepreneurs simply look for the lowest interest rates when they go shopping for business loans. In the rush to secure loans, they often wind up ignoring many important factors.
Though interest rates are important, you shouldn’t make your decision solely based on this point. Don’t surrender too much flexibility and control over your business just so you could save a few points on your interest rates. Not going through all the terms and conditions may leave your assets and even your entire business at risk of being taken away from you during tough times.
Look around and see what kind of loans are available.
Different banks provide different business loan products to their customers. You can find the difference between them by reading the fine print.
Here are 5 important factors that need to be considered before you sign up for a business loan.
- The term period of the loan
A longer loan term means increased borrowing costs. However, this could be a useful expense since it can protect you against cash flow troubles.
- Size of the loan
How much is your project going to cost? What amount is your bank ready to offer as a business loan?
This factor needs to be considered seriously before making your investments. You should also look into securing a second loan from another bank to diversify the risk.
- Flexibility Offered
How flexible would the lender be willing to be on repayments?
If you’re a seasoned business person, you’re already aware of how even seemingly perfect projects can develop problems over time due to unexpected developments. Sit down for an honest conversation with the loan officer to learn how the bank would react if you’re incapable of making the loan repayments on time. For example, will the bank suspend all principal repayments temporarily? Having this conversation beforehand can save you a lot of heartburn if something goes wrong.
- Collateral Required
What guarantees do you have to surrender to the bank in case you default on your payments?
Defaulting on your payments gives the bank the authority to dispose of your collateral to recover the loan amount. However, this is generally only done when there are no other options left since everybody stands to lose at this stage.
Collateral may include your liens, pledges, accounts receivable, inventory, 3rd party guarantees, real estate, and personal guarantees. Your collateral will depend on the terms of the loan, the business you’re engaged in, and your bank’s flexibility during negotiations.
- Financial Reporting
Does your bank require any financial and reporting obligations?
Many loans require businesses to submit their annual financial reports and statements as part of the terms. Small-sized loans generally do not have stringent reporting requirements.
Protect Your Company’s Cash Flow
It’s crucial to negotiate the terms and conditions of your business loan to ensure your company’s interests are not at any significant risk. The loan term, the size of the loan, and other considerations need to be evaluated carefully before a decision is made.
Doing so will help your protect your company’s cash flow, thus ensuring you’re able to keep the company in a position to carry out its regular operating activities without facing a cash crunch.