Have you thought about applying for a small business loan? Maybe you’re in the process of sending in applications right now. Before you do anything else, read this blog post! We’ll discuss the six questions you need to answer for yourself before applying.
These questions are important and we know you’re anxious to move your business forward, so let’s dive right in!
1. How Will A Loan Help Me Achieve My Goals?
Applying for a small business loan is exciting. An influx of capital feels good. But before you go counting all your extra cash, you first need to ask a very important question: “Will this loan put me in a better position to achieve my goals?
Accepting a small business loan isn’t a risk-free endeavor. Things might no go as planned. Depending on the kind of loan you take out (more on loan types in question six), you may need to make certain sacrifices to pay it off.
Additional capital can do wonders for your business, but only if you know what you hope to achieve with the cash before accepting it. So make sure you’ve thought through your goals and that every dollar you borrow is invested back into your business to make more money in the future.
2. How Much Money Do I Need?
If you’ve decided that, yes, applying for a small business loan will help you achieve your goals, the next step is determining how much money you need to borrow. What do you plan to do with the cash? How much will that cost?
If your goal is to stock up on new inventory or invest in new equipment, it should be easy to calculate the size loan you need. Just tally up all costs involved. The costs to accomplish certain goals may be harder to pin down, though.
For example, implementing a new marketing strategy has a lot of potential variables. In situations like this, do your best to accurately estimate the amount of money you’ll need. Then stick within that budget once your loan has been approved.
3. Can I Afford the Monthly Payments?
You can know exactly what your goals are and pinpoint the perfect loan amount to turn your dreams into a reality. But if you can’t afford the monthly payments, you shouldn’t be applying for a small business loan. Plain and simple.
If you find this to be the case for your company, consider breaking your goals down into smaller, more manageable chunks. Maybe you can’t afford to borrow $50K at this point in time. But can you start your project with a $10K loan instead? It doesn’t necessarily have to be an all or nothing scenario.
We should also mention that loan affordability is affected by many things such as credit score, interest rate, and loan length. Be sure to look into all of your small business loan options before determining that your desired amount is too far out of reach.
4. How Long Will It Take Me to Pay Off the Loan?
There isn’t a “right” answer to this question. You just need to take an honest look at yourself and your business and determine how long you’re willing to make payments. Make sure that the amount you need to borrow, the monthly payment amount, and the length of the loan all balance out for you personally.
That being said, there are a couple of compelling reasons to take a shorter term loan:
- First, your loan will be paid off quicker giving you the freedom to then borrow more money (if needed) at better terms.
- Shorter term loans also give borrowers access to lower interest rates. Why? Because the quicker you’re able to pay back a loan, the less risk your business represents to a lender.
Yes, a shorter term loan will result in higher monthly payments, but the benefits may be worth it. We recommend looking into all possibilities before applying for a small business loan.
5. Do I Have Good Credit?
The better your credit score, the more likely it is you’ll get approved when applying for a small business loan. Good credit can also make you eligible for a lower interest rate. But what exactly is a “good” credit score?
It’s commonly understood that bad credit is a score below 550, fair credit falls somewhere in the 600 range, and excellent credit is a score of 750 and above.
If your business happens to fall into a lower bracket, you may determine that enrolling in a credit restoration program before starting the loan application process is a wise move. In as little as six months, you could drastically improve your credit and qualify for better loan terms.
6. What Kind of Loan Is the Best for Me?
Finally, you need to determine which kind of loan will be best for your small business. There are multiple options including:
- Term Loans: A term loan is a standard form of business financing. A company is provided with capital upfront, which they repay (plus interest) over an agreed upon amount of time.
- Business Lines of Credit: Just like you can get lines of credit for personal use, your business can too. Basically, you’ll have access to a certain amount of money. You only pay interest when you tap into those funds.
- Invoice Factoring: Invoice factoring allows you to gain access to the funds you’re due before they’ve been paid by your customers. The invoices are sold to a company, which then is responsible for collecting the money when payment is due.
- Reverse Consolidations: If you’re looking for a loan to consolidate multiple cash advances and begin working your way out of debt, a reverse consolidation may be perfect for your company.
When applying for a small business loan, it’s important to understand which loan type will suit your company and the goals you have best. Fortunately, you don’t have to figure this all out by yourself.
The financial team at Cast Capital are experts in this field. Not only can they off you each of the loans mentioned above (and more), they can also help you choose which route will best help you accomplish your goals. We encourage you to set up your free consultation today!
Is a Small Business Loan Right for You?
Applying for a small business loan is exciting, but before you do, make sure to answer each of the six questions mentioned in this blog post. Your answers will help you determine if a loan is right for your company and which kind to apply for.
If you decide that your business is, in fact, ready for outside funding, contact us today. We’d love to discuss your goals and how we can help. And remember, our financial experts are standing by to help guide you through the entire process.