If you are a small business looking to expand or need some quick money for an emergency, chances are that you might accept the first loan offer that seems to be fine. Things aren’t as simple as that. There are many factors that you need to consider before applying for an SME loan or agreeing to any form of small business financing. You might get an unfavorable interest rate, or you might land yourself in a sticky cash-flow situation.
How do you avoid traps and pick the right SME loan? Here is what the industry experts have to say that could help you determine what you should ask yourself:
- How much do you need?
This is the first question that you need to ask. Be realistic and stay flexible, but within reason. Getting too small a loan means you will not be able to fulfill your requirement; too large a loan just means more money than you will have to pay interest on. Please choose a principle amount well.
- Have you got the best interest rate?
Interest rates vary not just from lender to lender, but can also increase based on the amount that you wish to borrow as credit. Understand the various loan schemes that the market has to offer before you plunge in. Ask about processing charges and application fees. Also, check whether the loan has a prepayment penalty. Take into account all charges to arrive at a better estimate of the loan’s total cost.
- How long do you need the loan?
The loan tenure is an important factor that you need to consider before you sign on the dotted line or press the apply button. A longer loan tenure could be good for you, but that could also mean the loan being that much dearer. However, SME loans are offered for short periods of time.
Another advantage of a long-term loan is that payment schedules are further spaced out, easing the payment pressure a bit. However, to be eligible for a long-term loan your company must have a strong credit rating.
- When do you need the loan?
Small businesses tend to run for a loan in an emergency. If you need the money urgently, you will get it, undoubtedly, but it will come at a cost – a higher interest rate. If your loan is for a future expansion plan, and you have the patience to wait it out, then do so. The money that you will save could be a considerable amount.
- Why do you need the loan?
If it is for a one-time purchase, a term plan is a good idea. If you need the cash to buy equipment or for inventory, look for an option to finance the purchase.
If regular cash crunch is the issue and you just need funds to help you tide over your recurring expenses, look for a line of credit or a business credit card. Understand your need advises an Entrepreneur article, and then apply for small business loans.
- Are you qualified?
Your loan application rides on how well you and your business are doing. Check your credit score before applying. Look at your annual revenue and decide how much of it can be put aside for loan repayment, as it will be an additional expense. Don’t forget that your loan has to justify itself – to you and the lender.
- Get documents ready and apply
Hesitation should not be an impediment when seeking small business financing tools such as loans. If a little capital will help you grow your business, it is worth a shot.
You can apply for an SME loan with SME Corner at www.smecorner.com