Dos and Don’ts of Business Loans

Taking a business loan might seem easy especially if you have a good credit report and a decent financial standing. Many banks and financial institutions might come forward to offer you the required funding for your business at terms that might be favorable to you. Nevertheless, there are a few dos and don’ts you need to remember before you sign the deal for any business loan.

Do not apply for too many loans

If this is the first ever time you are taking out a business loan, it might get tempting to apply for multiple loans, in the hope that something might click. Nevertheless, this kind of approach can actually harm your credit score, reducing your chances to qualify for a business loan.

Credit is the first thing a lender will see when you apply for a business loan. With every loan that you apply for, or maybe every quote that you get, you tend to dent your credit score by some points. The best way to deal with this would be to get to know the qualification criteria from a couple of lenders and apply only for those options that you are highly likely to qualify for. Make sure you understand everything there is to know, about credit check policies, before you sign the contract.

Get to know the cost of the loan

The costs of loans can vary from lender to lender. As such it becomes difficult to compare the loans while picking out a lender. So, it would be better to find out from the lender about the APR or Annual Percentage Rate of the loan.

APR is calculated after taking into account, the interest rates, and all the charges that you may have to pay towards the loan. It can be anywhere between 6 and 9 percent depending on the type of loan you go for, and the lender. In case you have contacted an alternative lender through merchant cash advance leads, you might find this APR on the higher side. However, you can get the cash much faster than in any other option, even if you don’t have a decent credit score.

Short-term loans have higher APRs when compared to long term loans since you tend to save up on the interest over the long run. The total amount of money that you pay back here is relatively low when compared to a long term loan.

Make sure you are aware of prepayment penalties

Paying back a loan before its due date typically comes with prepayment penalties, unless you are going for one of those SBA loans. This is because the lender loses out on the interest that he would otherwise earn on the loan. In most cases, the prepayment penalties amount to about two to three percent of the loan amount’s outstanding balance. Nevertheless, in some cases, this could be calculated on a sliding scale. So, the earlier you pay back your loan, the higher will be the penalty you would be charged with. Find out what kind of penalties you will have to pay should you decide to pay back your loan early. If possible, negotiate with the lender to do away with these charges before signing the agreement.

Don’t forget to explore your options

Banks are not the only places you need to approach if you need any funding for your business. You can go for a merchant cash advance, peer to peer lending, invoice factoring, or even a business line of credit that might work better for you than a bank loan. Go through the pros and cons of each of the options you have and then make your decision based on your requirements and financial situation.

Most business loans offered by banks and traditional financial institutions are secured loans wherein you will have to provide some collateral. If you do take a loan like this, consider what you are going to lose if you default on paying back your loan.

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