As a small scale business, do you ever consider taking a business loan? Is it worth it?
In deciding if your business needs a boost financially, can be a very difficult one. From friends and families discouraging you and only feeding you on the down side, constantly giving you reasons why that option will fail and unsolicited cautionary actions.
It is not wrong to seek opinions, but ultimately the decision is yours and your partner, if you have one. If you think your business is prepared to take a step forward for the better and you don’t have the working money to do as such, consider taking a Loan.
What is a business Loan?
A business Loan is acquired capital that organizations apply toward costs that they can’t pay for themselves. Some entrepreneurs use these acquired capital to pay for; pay rates and wages until their business makes headway, while some organizations use them to provide office supplies, stock or business projects. Entrepreneurs should make a point to have an unmistakable record of accounts stating how the cash will be spent because moneylenders and financial houses needs to know how the business expects to utilize the loans if given.
It is no news that loans are not given out for free. So, before you consider getting a loan, it is essential to enquire about the interest rate. Is it fixed or variable?
What does it mean when an Interest rate is fixed?
A fixed interest cost implies that the loan fee stays as before for the term of the credit and its recompense period.
A variable loan cost demonstrates that the loan fee can change. This depends on a variety of reasons. Another area to consider is the time frame (months or years) which you are expected to pay back. In addition, the lender expects collateral in events of the business inability to pay back.
Every day, people come up with different and brilliant business ideas but lack funding. The next line of action could be seeking donations from friends and savings or taking a loan. Because of the high demand of loan seekers, not every business that applies for loans gets it and most times, amateur businesses suffer this.
In the event that a business defaults, and cannot pay up, there are a couple of things that may occur. The business could utilize more obligations financing to produce the capital it needs to take care of the credit. On the off chance that there was a collateral as earlier mentioned being held by the moneylender as security for the loan, the moneylender or financial institution could guarantee that resource as installment.
Is that an option you are willing to take? Para adventure you can’t pay up and all, the business is lost completely.
For your business pleasure, here are some useful tips to consider before taking a loan:
- Why you need a business loan
It seems like a no brainer, but you would be surprised to hear that a lot of business owners are either not exactly sure why they need a loan or don’t have a good enough reason for taking a loan. Lenders will always ask for your reason for applying for a loan so make sure you understand this properly as it plays a role in whether or not your loan application is approved by some lenders.
- How much you need
You need to be sure of exactly how much your business needs. It’s advisable no to apply for more than you need as this might affect your ability to pay (more on that later). Once you have a good understanding of why you need the loan, it would be easier to determine the exact amount you need.
- How long you need the loan for
It is important to consider this factor as it will aid your decision making on what loan providers and offers you should go for. With a clear understanding of why you need a business loan, knowing how long you need it wouldn’t be difficult.
- Your ability to pay
This is why it is important to not take more than you need, it’s a loan and you would have to pay back. Be sure of your ability to pay back the amount you are applying for. You can determine with the cash flow of your business (more on that in the next point). We also recommend that you use loan calculators to get an idea of how much you would be required to pay back for the amount you want to borrow. Most online lenders have loan calculators on their websites.
- Your Cash Flow
Simply put, your cash flow is the amount of money your business earns monthly compared to the amount of money your business spends monthly. It is important that your cash flow is positive (that is you’re making more than you spend) and consistent. While this would help you determine your ability to pay back a loan, lenders use this to gain insight into the financial state of your business.
- Loan Type
There are various types of business loans offered by lenders in Nigeria. However, it is important to fully understand the loan types offered by a lender before applying send a mail or call if you have to for clarification.
This is the duration for which a loan provider can give you a loan. By now you should know how long you need the loan for, so you should consider the tenure of a loan provider or offer. It would be wise to find a loan provider whose tenure matches how long you need the loan for.
- Interest Rates
Simply put, this is the rate charged by a lender on the amount borrowed to you. The interest rate, along with the tenure and amount you want to borrow are what determine your repayment so it is important you consider this before deciding to apply for a loan with a provider
Loan terms vary by Lender and Loan type. Always make sure you understand the terms attached to a loan before you apply. These include eligibility criteria, application requirements, repayment terms, etc.
- Application Process
Depending on how fast you need a loan, you should consider the application process of the lender before applying. How long it will take to get a credit decision? What is the application requirement? What documentation (if any) do I need to provide? Can I apply online or do I need to visit a physical office? Answer these questions while considering who to borrow from.
As an entrepreneur, if you feel taking a loan is too risky and you think you cannot afford to pay back, do not be discouraged. Don’t let that business idea die. Another opportunity you can explore is government funding as well as other institutional funding. The world is big enough for you to succeed. You only need the right tools and information. Keep reading, Readers are Leaders.