5 Things To Look Out For Before Taking A Business Loan
The idea of taking a business loan is often quite scary. Unfortunately, successful SMEs in Nigeria understand that taking periodic business loans is an undisputed aspect of owning a small business and one of the most difficult decisions an SME owner will face. Whether you’re aiming to grow your business exponentially or just to keep your boat steady and afloat, a small business loan when applied right can be a vital reason for the success of any business venture.
A business loan is quite simply, the lending of cash by a person or organisation (a lender) to another entity (a borrower) for a stated purpose and on the agreement that the loan be repaid at a time agreed by the parties. In most cases, the lender stipulates that the borrower pays back the loan money with interest. Some form of collateral is generally required to secure the loan, and these could come in the form of your business’ assets, real estate, equipment or machinery.
Clearly, there is a lot at stake, but regardless of your worries, business loans can come in handy in more ways than one. As an entrepreneur in Nigeria, if you know where to look, the funds from your loan can be used to procure the equipment your business needs, rent a bigger operational space or hire more employees. Business loans can also eliminate the tough decision making of reducing the number of employees and deciding not to expand operations all because of the unavailability of having funds.
The outbreak of COVID-19 this year was unexpected and so took the world by storm. Apart from the health implications we all are still reeling from, the global economy and the business sector has been dealt serious blows as well. The situation is so bad that even stable sources of income are no longer guaranteed. More SMEs in Nigeria closed down this year than was expected and surviving businesses have had to reduce their expenses quickly.
The need to seek loans to enable sustainability or survival is on the rise. And since business loans are so crucial to SMEs in Nigeria, let’s look at some of the essential things you need to look out for before taking on a small business loan.
1. Determine the purpose of the loan and the amount you need
Once you’ve decided that you do, in fact, need a business loan, it’s important to be precise about what you need the loan for and how much you need. The amount of money your business is applying for must be dependent on the reason for the loan, and this could be the acquisition of an asset, the expansion of business operations or any other reason.
You don’t want to go through this process multiple times, so make sure you know exactly how much you need to accomplish your goal. Avoid taking loans larger than you need because their interest rates will prove too costly for your business to maintain. Take this part seriously because understanding your why will lay the solid framework for every other decision you make as regards the proposed loan.
2. Type of Loan Best Suited For Your Business
You should decide on the type of loan you want to take as many types of loans are available. There are commercial loans, secured and unsecured loans, installment loans, and inventory loans to mention but a few. Do your homework here, find out the kinds of business loans available in your industry and decide the type of loan based on why you want it.
It does not matter if you find it challenging to decide on the type of loan. What matters is that you research carefully and decisively. Consult your mentors, financial advisers and as many experts as possible here because once you set the ball rolling, getting out wouldn’t be easy.
3. Consider Your Lender options
Now lenders are generally divided into two groups, traditional and nontraditional lenders. Traditional lenders consist mainly of banks and various credit unions. These institutions are traditional because for as long as business owners have lived, they have offered lower interest rates and friendly repayment terms as conditions for the business loans they grant.
They also require several financial documents, like the debt schedule, financial statements and tax returns and the collaterals for the loan if any. Nontraditional lenders offer loans at higher interest rates, they make fewer demands for documentation from the borrower and their underwriting procedure is short. They are most proffered by businesses with low creditworthiness.
4. The Loan Interest rates
Loans do not come for free because, at the end of the agreed time, you would have to repay the loan amount along with the accumulated interest. An interest rate is an amount that the lender charges you on top of the money loaned. It is crucial that before you take on a loan, you do thorough research to know which lenders in your industry offer the lowest interest rates.
The total amount of money you will need for repaying the loan depends on the interest rate and lower interest rates will keep the repayment amount within limits reasonable to you. Find out if there are other hidden charges, such as administration fees, processing fees, and appraisal fees. When you are ready, select the lender that offers the lowest interest rate.
5. The Repayment Terms of The Loan
It is vital to examine the lender’s payment terms before you commit to assessing whether it will be convenient for you to pay back. Find out how flexible they are willing to be if the payment structure does not work for you. Would they want you to repay the loan when you might not be ready to do so? Is the interest going to compound to more than the principal over the life of the loan? Are there origination fees or early payment penalties?
Penalty charges in this context are charges taken by the lender in the event of any delay or refusal on your part to repay the loan, so you need to do your homework on this carefully. Some lenders hide these penalty charges in unassuming parts of the agreement so if you don’t see them, ask about them outrightly. It is best if you know and understand all these before committing to the loan terms because that way, you can avoid any complications in the future for the repayment of the loan.
Finally, before you sign on the dotted line, make sure you understand what you’re signing. Ask questions if you are confused. Don’t sign hurriedly, consult as many experts as possible before you commit. Keep in mind that everything connected to your loan hinges on how you decide on the loan.
Your decision can make or break your purpose of taking the loan and in most cases, even your entire business. So when you need to take a business loan, make sure you do all the due diligence, acquire all the necessary knowledge and analyze the situation well before you finally apply for the business loan.