Business loans are a much-needed source of capital for startups and small businesses. But unfortunately, there are also abuses with these loans that can hurt your business. Paying 100% interest on a loan is never a good thing. This article will teach you all the basics to evaluate, what to look out for, and tips to avoid scams so you can get the best loan available to you.
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Look Into Merchant Cash Advances
Merchant cash advances are an alternative financing option for small businesses that need money to operate. They take a percentage of your future sales in return for providing funds until the advance is paid off. Unlike a traditional loan, the lender (called a factor) looks at your business's overall performance instead of your credit score to determine eligibility.
Consider The Fees
A business loan offers you the capital you need to operate your business. However, a loan meant to help your business growth could cost you more than it saves if you're not careful.
Here are three of the most common fees to keep an eye out for when applying for a business loan:
Origination fee - Lenders charge a "processing" or "underwriting" fee when setting up a new loan, which is expressed as a percentage of the total loan amount, typically from 1% to 6%. If you're borrowing $100,000 and are charged an origination fee of 3%, you'll be paying $3,000 upfront to get your money.
Closing fee - You may also be charged a closing or funding fee. This is similar to the origination fee but is typically charged by large commercial lenders or SBA loans in exchange for making the transaction happen quickly. Closing fees are usually between 0.5% and 3% of the total loan amount but can vary based on the lender's policy.
Prepayment penalty - Many lenders charge a prepayment penalty if you pay off a loan early. The idea behind this is that they make money off interest.
Not Having A Business Plan Could Cost You
When you apply for a business loan, the first thing a lender will ask for is a business plan.
A business plan is essential for a successful business loan application. It is arguably the most important document you will need to get your loan approved. The business plan is one of the most crucial things that any lender wants to see before approving a business loan. The business plan helps you answer critical questions about your company; it also helps you think through what it takes to achieve the goals you have set out in the plan. Here are a few things to include when creating a business plan.
- A successful business plan has five main components:
- A description of your company's products or services.
- A description of your target market and customers.
- Financial data including financial statements and projections.
- Details on how you will use the money from the loan.
Check Out Interest Rates And Fees Before You Apply
Before you start shopping for a business loan, make sure you understand the cash you'll need to borrow. Knowing exactly how much money you want will help you determine which loans are suitable for your business and likely save you time and money.
While it's tempting to apply for several loans at once, resist the urge. Applying for multiple loans within a short time window can impact your credit score. Each application generates a "hard inquiry" on your credit report, which can lower your score by a few points.
When comparing lenders, check out interest rates and fees before you apply. If a lender charges an origination fee, they will deduct a percentage of your loan amount when they issue the funds. For example, if they deduct 3% from a $10,000 loan, they will only give you $9,700 to use.
Also, consider whether or not the lender requires a personal guarantee or collateral to secure the loan. As with any financial product or service, it's always best to read the fine print before signing on the dotted line!
Payment Schedules
A payment schedule is essentially a record of payment dates and amounts you need to pay. It also includes details of your current loan balance, the date it was taken out, and the date the loan is to be repaid in full. The details in a payment schedule vary from lender to lender and from type of business loan.
Payment schedules for some types of loans tend to be more rigid than others. You may be able to negotiate a flexible payment schedule with some lenders. Some lenders are willing to work with you if they think your business has potential. However, most will want you to pay back your loan on time every month, or they may threaten legal action against you or your company.
To review a payment schedule before you apply for a business loan, you should find out your current financial situation. You should also know how much money you have coming in and going out each month. Many lenders will require this information as part of their application process, so you must provide it.
Conclusion
Hopefully, this article will help you find the perfect business loan for your business. But if you need more information, there are many resources available that can help. There is no shortage of advice available from business loan sites designed to make the process easy to financing and lending experts who are knowledgeable about local trends. Whether you proceed on your own or enlist the aid of financial services professional, hopefully, this overview helps provide a good foundation for either option.
