Are you thinking about applying for a small business loan? If so, ask yourself why you want one. Are you trying to start a new business and require startup funds? Do you want to expand your business by purchasing additional equipment and inventory? These are all reasonable questions that you need to answer first.
A small business loan is a great way to build up your company’s credit history. Lenders typically look at the personal credit score of the business owner to determine their trustworthiness with a business loan. If you have a good personal credit score, you shouldn’t have a problem getting approved for a small business loan. Just make sure you have a purpose for the loan.
1) The Amount of the Business Loan
If a lender sends you a letter which states you’ve been approved for a $250,000 business loan, don’t automatically apply for it. Just because you’ve been approved for a certain amount of money, it doesn’t mean you need a loan for that much money.
How much do you really need to boost your business? Add up all the expenses you need to cover, such as inventory, hiring employees, marketing, and so forth. It should be an amount that covers these expenses for at least 12 months. If you take out a loan for more than what you need, you may end up with too much debt, and you’ll be paying more interest on money you don’t need.
2) The Type of Business Loan
What type of business loan are you looking for? Do you want a standard bank term loan or some other type of business loan? Your additional choices include a business credit card, merchant cash advances, business lines of credit, and SBA loans. Some options are better than others. Your choice will depend on the financial status of your business and your reasons for wanting the loan.
For example, if you want a cash reserve on hand for your business, then a line of credit would be a better option because you would only pay interest on the money you actually spend. The only downside is that a line of credit may have a higher interest rate than a bank term loan.
Therefore, you wouldn’t use a line of credit to fund a business startup. A standard bank term loan would be more appropriate for startup funding because it has a lower interest rate.
3) Amount of Current Debt
Don’t take on debt you can’t afford. Many business owners fantasize about repaying all their debts once their business takes off and becomes highly profitable. But there’s no telling when or if this will ever happen.
If you have several business debts, don’t take on any more until some of the current ones are paid. Otherwise, if you default on any of your debts, it’ll be difficult to be approved for a new business loan in the future.