When to Take a Business Loan: 5 Factors to Consider for Success

business loan

The business world is becoming increasingly competitive, and small businesses are finding it challenging to keep up with the changing dynamics. Small businesses need to think about expanding and growing their business to stay relevant in the market. However, many small businesses don’t have enough cash reserves or enough collateral to secure a traditional funding source like a personal loan, business line of credit, or an asset-based loan. In this scenario, many businesses turn to alternative lenders like Business Loan providers.

In this blog post, we will take you through different factors that could help you decide whether a business loan is right for your business.

What is a business loan?

A business loan is a form of financing that is offered by banks or financial institutions to help small businesses grow and meet their immediate cash flow needs. In other words, a business loan is a type of financing that you can use to either start a business or expand an existing business. There are various types of business loans, and you can choose the type that best meets your business needs.

4 Types of business loans

1. Term loans

A term loan is one of the most common small business loans and is a lump sum of cash repaid over a fixed period. Typically, monthly payments consist of interest on top of the principal balance. You may use a term loan for a variety of purposes, such as daily expenses and equipment.

2. SME loans

An SME loan is a source of funding for small and medium-sized business enterprises. An SME loan is used to meet the borrowing needs of SMEs. It is provided as a single line of credit for SMEs. It may be used for working capital or long-term requirements in addition to short-term requirements. It is evaluated based on the nature of the business, cyclical trends, cash flow projections, and peak time requirements.

3. Equipment loans

If you don’t have the capital to purchase expensive equipment, you might want to consider an equipment loan. These loans are designed to help you purchase costly machinery, vehicles, or equipment that retains value, such as computers or furniture. Usually, the equipment you purchase will be used as collateral if you are unable to repay the loan.

4. Commercial real estate loans

You can finance a new office, warehouse, or retail space with a commercial real estate loan (commercial mortgage). These loans work like term loans and may allow you to purchase a new commercial property, expand an existing location, or refinance an existing loan.

Why should you take a business loan?

Here are some reasons why taking out a business loan may be the perfect move for your small business:

When you are ready to expand your physical location

Taking a business loan to expand your physical location is a good idea if you have exhausted all other options and if your business is ready for this next level of growth. Taking a business loan to expand your physical location is a good idea if your business is ready for this kind of growth. 

To build credit for the future

If you are seeking to obtain larger amounts of financing in the future, you should consider obtaining a smaller, shorter-term loan now. It is common for businesses to be unable to secure a large loan if they lack a strong credit history. You may begin with a smaller loan, pay on time and demonstrate to creditors that you are a good borrower. This has more than one benefit, as it not only improves your credit history but also establishes a relationship with a lender that you may ask for a larger loan in the future. 

To purchase equipment

Your business requires the equipment for your processes to run. Whether it’s machinery, tools, or IT equipment, you may require a loan to purchase them. Because of this, equipment financing is a great choice. You may also use equipment as collateral on your loan if you take out equipment financing. 

To purchase more inventory

The cost of inventory may be one of the most significant expenses for a company. Your customers’ demands should be met just as you would buy sufficient equipment. If you’re working with a limited budget, this may be difficult. Before you apply for a loan to re-stock your inventory, create a sales forecast based on your sales in previous years around the same time. This will allow you to determine whether or not now is a good time to take out a loan. 

Increasing working capital

In layman’s terms, working capital is the money required to manage daily business activities. If a small business cannot afford operational expenses in the early stages, it may seek a loan to cover them. A business may borrow temporary money from a financial institution to get off the ground and develop if they have good credit and a detailed business plan.

Banks give working capital loans, which are riskier than real estate loans and hence have higher interest rates because they consider them risky. When the company is mismanaged at a vital phase in its development or if the company’s earning assets never generate income, the company will be forced to close down. 

Importance of business loans

Business loans offer a lot of benefits for startups, small businesses, and large companies.

Major business projects can be financed significantly.

With a business term loan, you can borrow huge amounts of money, instead of the capped amount in personal financing. This is particularly useful if you are funding a major business initiative such as expanding to other areas, providing new business facilities, and undertaking massive technological upgrades.

You are in charge of how you spend the money you borrow.

Your lender will not interfere with the way you spend the money; they will simply want to see your business plan so they can understand how you plan to run your business. As long as you repay the loan with interest, nobody cares what you do with the money you borrow, whether you spend it on your business or anything else.

You can access the money easily.

Rather than waiting for your business profit to grow before reinvesting them, you can obtain financing from lenders. Years of waiting to raise money for various business ventures, whether for buying new equipment or new product development, are not required. 

The interest rate is usually low

Business loans offer low-interest rates to entice customers. Even though lenders want to make a substantial profit on their investments, the lending industry is highly competitive, which makes it an excellent place for borrowers to find good deals.

Your business credit will improve

A responsible repayment history and an on-time payoff of your loan over the term will improve your business’s creditworthiness. In the future, you will have an easier time obtaining financing with lower rates and more favorable terms thanks to your improved credit rating. 

5 Factors to consider when choosing a business loan

‍When you need money fast, a loan can seem like the ideal solution. However, not all loans are the same. There are different types of loans with different conditions and implications. When considering whether to get a loan, it is important to understand the implications of that decision. Below are five factors to consider when taking a business loan;

1. Type of Loan

You should decide on the type of loan you want to take as many types of loans are available.

2. Interest rates

Loans do not come for free. You need to pay the interest. Therefore, you should do some study on the interest rates of different lenders. And you should eventually select the lender that offers the lowest interest rate

3. Credit Score

Your credit score has a decisive role to play when you apply for a loan. Therefore, make sure that your credit score is free from any strains as many lenders will assess your credit history before they approve your loan.

4. Repayment Term

Check out the repayment period for the loan. Keep in mind that the repayment period also determines the total cost of the loan. For loans with more extended repayment periods, the monthly installments are lower and vice versa. 

5. Your Financial Situation

One of the essential points of consideration before applying for a loan is your financial position. Keep in mind that you should go for only that loan which you can repay without straining your finances.

Documents we need at mwananchi credit ltd before approving for business financing

At Mwananchi Credit Ltd, we require several documents to show your eligibility to get a loan with us, and also provide assurance that you will pay back the loan once approved

  • Personal Background: Either as part of the loan application or as a separate document, you will probably be asked to provide some personal background information, including previous addresses, names used, criminal record, educational background, etc.
  • Business Plan: All loan programs require a sound business plan to be submitted with the loan application. The business plan should include a complete set of projected financial statements, including profit and loss, cash flow, and a balance sheet.
  • Personal Credit Report: Your lender will obtain your personal credit report as part of the application process. However, you should obtain a credit report from all three major consumer credit rating agencies before submitting a loan application to the lender. Inaccuracies and blemishes on your credit report can hurt your chances of getting a loan approved. It’s critical you try to clear these up before beginning the application process.
  • Business Credit Report: If you are already in business, you should be prepared to submit a credit report for your business. As with the personal credit report, it is important to review your business’ credit report before beginning the application process.
  • Income Tax Returns: Most loan programs require applicants to submit personal and business income tax returns for the previous 3 years.
  • Financial Statements: Many loan programs require owners with more than a 20 percent stake in your business to submit signed personal financial statements. You may also be required to provide projected financial statements either as part of, or separate from, your business plan. It is a good idea to have these prepared and ready in case a program for which you are applying requires these documents to be submitted individually.
  • Bank Statements: Many loan programs require one year of personal and business bank statements to be submitted as part of a loan package.

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