Term loans allow you to afford large business purchases or fund expansion projects, but they can put a big strain on your budget.
When looking for a loan, follow these tips to avoid taking on debt you can’t handle.
Consider Your Credit
Both personal and business credit scores have an impact on whether or not a bank will consider you for a term loan.
Excellent business credit is a sign of consistent cash flow and responsible practices. Comparable personal credit shows your ability to manage debt in other areas of your life.
If you don’t know your credit scores, take advantage of free credit reports to get this information.
Low scores can be raised by paying off existing debts on a consistent schedule. Take these debts into account when considering your loan to determine if you can manage another monthly financial obligation.
Look at Term Lengths
Banks and other lending institutions typically offer three types of loans:
- Short term loans are paid back in less than a year and have minimal qualification requirements.
- Intermediate term loans last from one to three years and are paid back in monthly installments.
- Long-term loans may span ten to 20 years, require large down payments and often need to be secured by some form of collateral. You may be limited as to what other debt you can take on during the terms of the loan.
Appraise the APR
The annual percentage rate (APR) of a loan tells you how much the loan will cost per year and is based on loan size, term length, availability of and demand for funds, your credit score and your ability to make payments.
Typical loan rates for small businesses range from six percent to 13 percent. Loans from the Small Business Administration (SBA) may offer a slightly lower APR.
Online lenders that are more lenient with credit score issues may charge a higher APR.
Avoid merchant cash advance companies at all costs. They charge predatory rates and work within an industry that is totally unregulated.
Read the Fine Print
Good loan terms may not be quite as favorable as they sound if the loan comes with too many restrictions and fees. Some loans have prepayment penalties that can add a significant amount to the total cost if you decide to pay the loan off early.
You also need to consider what happens to the debt if you are no longer able to pay it or you decide to sell the business before the entire loan is paid off.
Talk to several lenders before deciding where to apply for a business loan. When you find the institution with the right offer to meet your needs, sit down with a loan officer to discuss the requirements so that you have the best chances of getting approved.
Contact us today if you would like to speak with a business loan consultant about your options.