The decision to take out a business loan is a big one! If you think an infusion of outside funds could help you expand or save money, here are 10 questions to ask yourself.
Taking on debt of any type can be risky. You don’t want a loan to cut into your cash flow, making it difficult to meet your monthly obligations. Explore why you need funding and how it can help you reach your goals. Common reasons entrepreneurs seek out business loans include:
If you run a profitable business with decent cash flow but need funds to expand or refinance expensive debt, a loan can be a good idea.
Your annual gross sales, existing debt, and creditworthiness determine how much a lender will loan to a small business. But first, you need to come up with a number. How much money do you need to meet your business goals? A good place to start is by writing or updating your business plan. An effective business plan can help you manage money and indicate how much of an infusion would be the most helpful to your business.
If you don’t have a business plan, the SmartBiz Small Business Blog has an article to help you get started: How to Write a Business Plan for Your Small Business (Without Going to Business School).
The lending world has expanded far beyond term loans from a bank. There are now lots of options from a host of different lenders. In addition to traditional bank term loans, other types to consider include SBA loans, lines of credit, invoice financing, merchant cash advances, and even a business credit card.
Do you need to jump on a business opportunity or is your loan timeline flexible? Funds from some loans can be available in as little as a day while other loan applications can take weeks or even months. Keep in mind that fast money is usually expensive money.
Do you know your debt service coverage ratio(DSCR)? The DSCR helps lenders determine whether a business can take on a loan. The calculation is based on your available cash flow when compared to current debt and is one of the key metrics used to assess your eligibility for small business financing.
For help calculating this important ratio, head over to the SmartBiz Small Business Blog and read Standard Business Loan Debt Service Coverage Ratio.
If you don’t read the fine print, it can be difficult to determine if the stated interest rate actually reflects the true cost of the loan. Business owners can end up paying much more than they realized and get stuck in a loan they can’t afford to pay.
According to Leo Jacobo, VP, Head of Lending Operations for SmartBiz Loans, there is a relatively easy way for borrowers to discover the actual loan cost. That way is to determine the loan constant. Leo writes, “The loan constant is one of the oldest concepts in lending and used regularly by banks to calculate debt service burdens for both consumers and businesses. The loan constant reflects the full amount of cash required annually for debt service.”
Compare “apples to apples” by factoring the loan constant when considering different types of loans. Multiply your monthly payment by 12, and then divide the figure over the original loan balance. The resulting percentage is the true cost of borrowing as it reflects the total payment, interest as well as amortization for loans that require principal pay down.
Review this article for more information and specific examples: What Small Business Owners Need to Know About the Loan Constant.
If your strategy is to get a loan and pay it off quickly to save on interest, you might be out of luck. Read the fine print and talk to your lender to discover if you’ll pay penalties – and how much those penalties will be – for an early payoff. An early payoff can cost you more in the long run.
Note: 10 year term SBA 7(a) loans facilitated by SmartBiz Loans do not have a prepayment penalty. You can pay off your loan any time without an additional cost.
SBA loans are known as the “gold standard” in small business loans because of low rates, long terms, and very low monthly payments. Before you explore other types of financing, see if you’re qualified for an SBA loan. These are the eligibility requirements to apply for a $30,000 to $350,000 SBA 7(a) Working Capital or Debt Refinance Loan from banks that participate in the SmartBiz marketplace:
Learn more on the SmartBiz Loans website. Ready to apply? Create an account here and pre-qualify in as little as 5 minutes without impacting your credit score.*