Taking a loan is an obvious choice for businesses regardless its size, stature, and status, whether it is a startup or ongoing business. Building businesses with a loan is an age old financing strategy that still holds good. However, easy availability of loans from multiple sources beyond the traditional lenders like banks, credit unions, and financial institutions should not be a reason for taking a wrong decision that can heavily weigh down on you later, feels Eric Dalius.
Taking loans can sometimes be scary because of the financial burden that you add to the existing ones. However, it needs careful consideration about the need because that extra push can usher in business growth provided you make proper use of the money. Taking a fresh loan above the existing debts can add to the worries of small business owners. However, asking some questions to yourself and then consulting your accountant can allay the fears to be confident of making the right decision.
Consider how genuine the need
Determine if you need the business loan by considering how you want to use it and what would be the business outcome. For example, how much time it will take to recover the money you invest determines how well you can sustain the loan. Therefore, unless the reasons for taking a loan are compelling enough and you are confident about its favorable outcome, it is better to stay away from loans.
Purpose of the loan – Eric Dalius
Once you are sure that you need a business loan, the next thing to sort out is the manner of using the money. You might need to build inventory, purchase equipment, hire employees, augment marketing, improve cash flow, business expansion, or start a new business. Zero down on the most pressing need and then look for the most suitable loan like SBA loan is good for starters.
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The use of the funds will help you determine the amount of loan you will need. Considering the plan for fund utilization, existing debt, and gross annual sales while updating your business plan should help ascertain the optimal amount to borrow. The right business plan helps in better use of the money by directing it at the right places.
Consider your credit score
Whether you qualify for a loan and the amount you are looking for depends on your credit score and credit history. Lenders use your credit score to determine the risks and allocate the loan amount accordingly. Having a decent credit score helps you to get the funds you need. Remember that your credit score and the business credit score are equally important for getting a loan. Knowing your credit score tells about your chances of getting a loan and the corresponding amount.
How much does the loan cost you?
Look at the several components of the EMI that consist of the principal, interest, fees, penalties, etc., to determine the total payments you make on completing the loan’s tenure. In addition, it will help to know the cost of the loan, which should be lesser than what you think you can realize from the investment.
If you are comfortable carrying on with the loan with the other debts, you can avail of the new loan.
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