The decision to take on a business loan is not one that should be made in a day. With the ample business financing options available to small-business owners in today’s lending marketplace, it’s more important than ever to consider all options and how they will affect both your business and personal life. Before considering a business loan, ask yourself these three questions to ensure that you are ready, and able, to take on the commitment.
Can You Afford The Loan?
Many entrepreneurs and small business owners seem to go blind when it comes to monthly payments at the on-set of considering a small business loan. They get so excited about seeing the amount that they would be qualified to borrow without really thinking about how it will affect month-to-month
Let’s consider a 150k loan with a 10% interest rate and 12-month term versus a 150K loan with a 15% interest rate at a 72-month term. Going with the first option, your monthly payments would be $13,187.38. Opting for the second arrangement with a much longer amortization period, your monthly payments would be $3,171.75. While the appeal to pay off a loan quickly at a lower interest rate is there, the reality of the higher monthly payment can be a sobering fact. If your business will not be able to pull in the necessary cash flow to cover higher monthly payments on a loan, the wise decision is to take a loan with an interest rate and amortization period that will work for your business, not put you out of business.
Will Money Solve The Problem?
A lot of times, small business owners fall into the trap of thinking that a little bit of money will solve a lot of problems. Sometimes, this isn’t the case. Think about what you will be using the money for, and if the money will actually solve the problem at hand.
For instance, borrowing money in order to meet payroll may actually mean that you should reduce your workforce in order to grow your revenue and increase your cash flow. Likewise, taking out a loan in order to invest in a huge
Do You Have a Strategy For Positive Returns?
Borrowed money comes at a cost – sometimes a very high cost. Depending on your business, your business credit file or personal credit, collateral and a few other factors, you may or may not qualify for a SBA-backed small business loan. These secure loans generally come with a reasonable interest rate and a long amortization period. If you do not qualify for a bank loan or a bank line of credit, the money that you borrow will likely come at a much higher cost.
Alternative lenders offer quick and easy access to capital, but the APR on these working capital loans can easily skyrocket past 100%. The question here not only becomes if you can afford the monthly payments, but also if you can make 100%+ return on the capital over the period of the loan. For most small business owners, it will make more sense to take out a loan with a lower APR (10-15%) and shoot for an annual return on capital of around 40-50%.
Making responsible decisions early on in the borrowing stage of seeking a business loan can save you a lot of time, and money, along the way.