Growth is a desirable thing in the lifespan of a business – growth shows that your products/services are meeting needs; growth shows that your prices are right, and growth ultimately keeps you in business profitably. However, business growth doesn’t happen accidentally; sometimes, you’ll need to take strategic and proactive action to activate growth.
One of the ways by which you can activate growth in your business is to get a business loan. The cash injection from a business loan can help you open new product lines, expand into new markets, and increase your marketing reach among others. However, many young business owners often shy away from taking on loans because of stories they’ve heard about businesses that died under a debt burden. This article provides insight to three things you must watch when you apply for a business loan.
1. Limit the volume of your loan applications
Don’t apply for too many loans – it sounds counterintuitive because your natural tendency is to apply for as many loans as you can find – at least, one of the loan applications will succeed and you’ll get the money you need. What you might not know is that lenders usually run a credit check to ascertain your creditworthiness when you apply for a loan.
Many credit checks from different lenders suggest that you are in financial trouble and your desperation is causing you to apply for many loans. If you apply for many loans and the many lenders are checking your credit score simultaneously, it will show on your credit report and your credit score could take a hit; thereby making it harder to get a loan.
2. Understand the true cost of the loan
Many people are carried away with the desire to get the cash they need such that they forget that a loan is not a gift, and you’ll have to pay it back with interest. Understanding the true cost of a loan before you sign the dotted lines can help you make smart financial decisions so that you don’t end up with a loan that will eventually cripple your business.
To begin with, you’ll need to know Annual Percentage Rate (APR) of the loan – APR refers to the total interest and fees that you pay over one year. The cost of loans usually varies between traditional lenders and alternative lenders. For instance, interest on SBA loans could vary between 6% and 9% but online ondeck reviews suggest that the alternative lender charges a little bit more. However, an important point to know is that alternative lenders are less picky, have few requirements, and release funds in good time. Hence, the easier access to cash more than offsets the little extra interest that you might pay to alternative lenders.
3. Find out about prepayment penalties
As a business owner, you’ll always look for ways to minimize costs and maximize profits. After you have succeeded in getting a loan and your business is now booming, you might be tempted to pay off your loan in full earlier than so that you can reduce the amount of interest you pay over the long term. Lenders are however usually not happy when you try to pay off your loans early because of the revenue they’ll lose in interests.
Many lenders usually charge a prepayment penalty in order to recoup part of the interest that they’ll lose if you pay up early. You may want to shop around for a lender that doesn’t charge a penalty fee for loan prepayment. If your lender charges a prepayment fee, you may want to know how much the fee is and renegotiate a lower fee before you sign the loan agreement.