Business loans are very handy for business owners who want to expand their offices or get quick access to funding when they launch their companies. Is this always the good way to go? Obviously not, especially when you have no idea whatsoever on what you’re getting yourself into. Everything has its disadvantages, but they can be avoided if the situation is dealt with caution.
Before applying for a loan, you should take into consideration a few essential aspects that will help you find the best answer to your financial situation. There are four major questions you need to provide answers to when you’re about to get in the world of business loans. Should you not, you will be in for a world of regret and your business might be at risk. Let’s see the questions.
Business Loans – What to Establish Beforehand
- How Much Money Do I Need?
Naturally, it’s not a good idea to borrow more than you need. Or even worse, borrow more than you can afford to give back in the future. First, what do you need money for? It would be a good idea to analyse your needs and also your financial situation in order to avoid ending up with a debt that you cannot afford to pay. A skilled accountant can help you make the calculations in order to borrow exactly the sum you need, no penny more nor less.
It’s you that will be paying back the debt, so why would you get into a massive debt for nothing? Do not forget that the bigger the debt, the more interest you might have to pay. Assess how much you need and do not exceed that number.
- What Do You Need It For?
Make a plan and decide on what you will be spending the money in order to put your business on the right course. There are various types of business loans. Some of them are tailored for purchasing office space, others are for purchasing better, more modern equipment. The terms differ, as well.
So, knowing how you will spend the money before taking the loan is highly recommended. This will also help you discover the options you should compare and the ones you should use.
Answering this question will allow you to make the best decision loan-wise. And of course, it will show you that final sum we’ve talked about at Point 1. As you can see, these questions are not random. They are all interconnected, so you would not want to skip any of them.
- What Term Should It Have?
How quickly can you pay the loan back? Will you need a shorter or a longer term? This really depends on the type of loan and the things you need the loan for in the first place.
If you don’t have enough cash flow, a longer term is certainly better than a short one, because you won’t be penniless at the end of the month, after making your repayment. On the other hand, if your business is doing quite well and has the financial power to pay off the loan in a short period, then you should definitely do so.
- Can I Pay It Back?
This has to be italicised because it’s the most important question of them all. You’ll take your business loan, but can you actually afford it? Are you 100% sure that your business will be successful enough to give you money for the monthly repayment and give you a decent salary?
If the answer is “No,” then you might want to reconsider getting the loan, since missed or late payments will bring you bad credit and close some doors for your business. Wait until your business is running efficiently enough to elevate you to the position in which you can take the loan. Overwhelming debts can put your business at risk and also dramatically decrease profits, thus leading to more debt. It would be wise to keep it away from such a vicious cycle.
Business loans are fantastic; no-one can ever negate that. They can help you build a business, upgrade it, or even get it out of trouble in difficult situations. But when they are taken in spite of a business owner’s precarious financial situation, they cease to be the light at the end of the tunnel and can even harm your business.
Make no mistakes, because you’ll be paying for them. Before applying for business loans, make sure you already have a plan on how to spend the money, and also how to pay it off. It would be best to do plenty of research. If you have any further questions, enquire with us on our website here: www.alccommercial.com.au and you will find more behind-the-curtains aspects concerning business loans. Make sure you read everything carefully because the future of your business is on your shoulders.