With nearly 80% of individual Americans in debt, it’s no surprise that most businesses are also struggling with debt. It’s a necessary evil for companies to grow or if the people starting them aren’t independently wealthy. for your company to succeed with loans, start from day one by running a smart loan comparison.
Here are five things to consider when comparing the wide variety of small business loans available.
1. Don’t Take More Than You Need
One of the things to consider before you start hunting for a loan is how much your business really needs. One of the reason that eight out of ten businesses fail in the first few years is that they don’t have their revenue streams worked out. If you don’t have the framework in place to repay your loan quickly and easily, be wary about loaning any money at all.
Every business begins as a money-losing venture. If its based on loans, there’s a lot of work to be done right away to avoid penalties and start repaying on time. If you’ve self-funded the start of your business, you’ll be assured that you can make as many mistakes as you can afford to start out with.
Once you’ve built up some equity and capital with your business, getting another loan is easy. If you’ve got one profitable branch or department of your company, it’s much easier for you to expand your business. Whether you’re looking to get into other markets or to open up in a new location, lenders looking at your finances see your ability to repay by your success.
If you haven’t built up this kind of reputation yet, you need to start building it now.
Without a reputation to back you up, it’s hard for lenders to see what you can do. If you’ve claimed bankruptcy or have hit hard times in the past, you’ll have to build a case why you won’t fail again.
2. Ask About Early Repayment and Other Penalties
Some loans make it harder to pay back than others. Several lending institutions create policies to punish their loan recipients for not paying back as much interest as they’d like. When you pay your loan back early, you cut down on how much your lender makes on interest and they don’t all welcome that.
Some companies allow early repayment. It builds trust between you and the institution you’re loaning from. This is a healthy way to build a strong financial base, keeping yourself from paying too many bills every month.
There are several ways to be penalized by lending institutions. Failing to pay on time or failing to pay the adequate amount are some of the most obvious. However, hidden fees or requirements in your contract must be met in order to avoid penalties.
Some lenders put restrictions on what their money can be spent on or where. If you’re investing that money somewhere else, your lender needs to have everything in writing. Deceiving them during the lending process could land you in court.
3. Compare Interest Rates
Interest rates are one of the most troubling elements of taking out a loan. As you attempt to pay back your loan, you’re going to pay more than you borrowed from the lender. If you’re already on financially thin ice, this is a dangerous proposition.
By looking at the variety of interest rates out there, you’ll get a view of how much your loan is going to cost you. For companies with already thin profit margins, this is an unappealing prospect.
Sometimes a short-term loan has a higher interest rate than long-term loans. If you’re going to spend more to pay back a loan on 12-month lending period than a 5-year lending period, consider alternatives.
Interest rates change over time, so talk with a loan officer about whether you’re being offered a fixed rate loan or a variable rate. Every company has their own story when it comes to how much they’re going to make over the coming years, so make sure you’ve mapped yours out. Knowing where your company is headed tells you how much you can afford in loans.
4. Could You Avoid a Loan Altogether?
The best kind of loan to get is none at all. If you’re a savvy businessperson who has grown a business from scratch, there could be alternatives to taking out the loan you’re considering. Avoiding a loan means avoiding interest rates, potential penalties, and all the risks associated with loans.
GEnerating money through sales and standard profits is a much harder path but one that’s more sustainable. If you’re on the fence about extending your services or offering more products, try that if you can do so without a loan. Finding new revenue streams where you’re at right now is a fiscal solution that won’t put you at risk.
If rising costs are what’s getting you down, a loan will just leave you in the same position in a few months. Rather than chasing your tail in this regard, find ways to cut back on your costs. If payroll is adding up, cut back on staffing or outsource some of your work.
By starting internally, you’ll assess your real need for a loan.
5. Private Vs. SBA
When looking at loans, private loans offer higher amounts while accompanied by much higher interest rates. Ther’es a higher risk but they can be the windfall that your company needs in order to grow.
However, if you want loans that are sustainable for the long term, the SBA works with lenders on loans that help to keep small businesses afloat. SBA lenders work with small businesses throughout the life of the loan to ensure that they stay healthy.
They also work with community development organizations to ensure that businesses are part of the local economic ecosystem.
A Loan Comparison Requires a Sober View
Before doing a loan comparison, assess your business model fairly. Take the time to check that you’ll have steady streams of revenue for years to come. If you doubt your ability to pay back a loan, it’s doubtful your business will be able to soar without another wing to buffer you in the future.
Before taking out a loan, check out our guide for taking a good look at your credit score.