What to Consider Before Taking Out a Small Business Loan for Your Business

If you’re a small business owner, paying overhead, employees, and covering inventory can be difficult. On top of that, you’re looking to make a profit and pay yourself.

 

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Many small business owners take out a loan to strengthen their business. Whether it be an expansion, new construction, inventory, or even just to have some extra cash on hand, a small business loan can help your business grow, but there are some things you should consider before taking one out. Let’s take a look:

Total Long-Term Cost of Loan

The first question you’re probably asking is, “How much is a loan going to cost me?” While small business loan costs vary by bank or lender, in most cases the total cost of a loan will be the principal itself, plus any interest and fees.

The amount of interest you’ll pay is dependent both on how long of a loan term you choose and the interest rate. If you took out a $20,000 loan for 60 months, at 6% interest for example, you’d pay slightly over $23,000 by the end of the term.

There are generally fees as well. While you don’t need to pay them up front, they’ll get financed into the loan too. If your loan is meant to help your thriving business grow, however, that extra amount probably won’t be a big deal. Visit the SmartBiz Loans website for a list of fees applied to a low-cost SBA loan.

Are There Other Types of Funding Available?

If the idea of repaying a loan for the next few years doesn’t appeal to you, you could look into alternative sources of funding. There are grants available through the Small Business Administration, as well as private sources. In most cases, grants are given to businesses with a specific plan, so when you apply, be clear about what the money is for and how it will help you.

You could also raise money from investors. There are entire websites dedicated to helping small business owners find investors who are interested in putting money into your already established business. You may have to give up some equity in your company, however.

 

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Will You Be Able to Repay the Loan?

Taking out a business loan is always a bit of a risk. What if your expansion doesn’t go as well as planned? What if customers dislike your new products or your inventory doesn’t sell?

The loan you took out will still need to be repaid. It’s normal to worry about that but starting your business at all was a risk too. If you have an accountant, talk to them about your ability to repay the loan if your business starts doing poorly.

Will You Be Approved for the Loan?

Each lender has their own eligibility criteria, but generally speaking, in order to be approved for a business loan, you’ll need to have decent credit if you want a good interest rate. You’ll also need to provide financial statements from your business showing that you have cash flow to make the loan payments. You may need a cosigner or use your personal assets as collateral if not. If your business is doing well and your credit is solid, however, you should be able to get a loan with minimal hassle.

 

About the Author

Dave Rathmanner is the VP of Content for LendEDU – a site dedicated to helping consumers and small business owners better understand their finances. When he’s not working, you can find Dave rooting on Philly sports teams, watching Game of Thrones, or playing with his dog Dewey.

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