Small businesses all over the country can secure a small business loan to either start their own small business, or to expand and grow their existing small business. But when you are considering taking out a small business loan, what are some of the things you need to factor into your decision? Here are six key elements to think about:
1. Additional fees
Sometimes a small business loan incurs other fees in addition to the amount of the loan and the cost of interest. Does the lender charge a document preparation fee? Are there application fees? Do they have a registration fee for the loan, or any administration fees? Make sure you ask about all of these and find out if they can be included in the loan amount or if you have to pay the costs up front.
2. Interest rates
You always want to know what the interest rate will be before signing the loan papers. Different lenders may have different rates which can be affected by things like the level of risk. If the borrower has poor credit, the rate may be higher. Does the interest rate depend on the type of business you own?
3. Business loan insurance
Insuring the business loan is a good idea. If something should happen to one of the owners or stakeholders, the business loan insurance ensures repayment continues. Some loans also include life insurance for the individuals involved.
4. Repayment terms
There are all kinds of fixed and flexible repayment plans available depending on the lender you are working with. Talk to them about which one works best for your business, particularly if your business ebbs and flows depending on the season. If that’s the case, you may want a flexible repayment plan that allows you to make lower payments during down times and increase payments during the busy times.
5. Amortization periods
Equipment loans, leasehold improvement loans and real property loans vary in the amount of time the loan can be amortized or spread over. Equipment loans vary depending on the type of equipment and their expected life spans. Leasehold Improvement loans vary depending on how long your lease is. Real property loans will typically be amortized over a longer term because real property is not “movable”.
6. Personal guarantees
Find out if your lender requires you to personally guarantee the loan. If so, all of your personal assets will be used as security in the event you don’t meet your loan repayment obligations. They can go after your home, your vehicles, equipment and any other personal items of value in order to repay the loan.
Small business loans are a valuable tool for business owners starting out or trying to grow their business but who don’t have the capital available to do so. Just make sure you fully understand what you’re signing up for before you put your signature at the bottom of the page.