Seeking financing for your business can be a great way to take it to the next level, but getting a business loan is not a decision you should take lightly. There are fees and costs associated with borrowing from a lender that you need to consider. You must take the time to research and understand the terms of the different types of loans available — it’ll help you determine which one best fits your business’s needs.
At Evolution Capital Group, we understand it may be overwhelming to decide if your business is ready for a loan. We’ve listed four questions you can ask yourself that may help you make that decision.
What to Ask Yourself Before Approaching a Lender
A business loan represents a higher risk for lenders than a personal loan, which is why they set strict eligibility requirements. We found these four questions crucial to meeting those requirements and decide whether or not to finance your business.
- Why does my business need a loan? Determining the purpose of your loan will help you choose the type of loan you’ll need and anticipate if it will drive your business’s return of investment (ROI) and growth. According to a survey by the Employment and Training Administration, 96% of borrowers said the loan enabled business growth. You see, your financing needs will differ depending on the project you’re funding; if the loan doesn’t bring in value to your business, you may want to reconsider. Getting a short-term loan, for example, would mean higher payments, lower cost associated with borrowing, think annual percentage rate (APR), and shorter repayment frequency — six months to a year. If your company has seasonal cashflow, for example, the extra capital would be helpful during slow seasons. Still, if the loan doesn’t contribute to your overall business growth and ROI, or you can’t make payments, a loan may not be the best approach.
- How much money do I need to borrow? Having an estimated amount of money to borrow will show lenders you’re organized with the goals you set for your company and your commitment to repaying the loan. It will also help you decide which lender best fits your needs. Whether you need a $500,000 or a $250,000 loan, knowing how much money you will need to finance your business will help you make the right decision.
- Is my credit score good? Having a strong credit score will make you a more appealing candidate for approval and lower interest rates. Lenders look at both personal and business credit profiles to evaluate loan applications. But don’t worry, having a strong credit score is not a guarantee of a loan, and weak credit scores don’t mean you’ll get denied. The right lender will point you to loans you may qualify for, even with a less than desirable score.
- When do I need the loan by? With all the implications in borrowing a loan, you want to make sure you time it just right. Some projects may be time sensitive and may not offer the luxury of waiting for loan approval, which can take time. Review your business plan and determine the time you’ll need to allocate the capital appropriately. That way, you’ll ensure you’re not jeopardizing your ability to repay the loan or compromising your business.
Before you approach a lender, go through these questions. They’ll help you better prepare and decide whether your business will benefit from borrowing a loan.
Reasons to Get a Small Business Loan
As you’ve seen so far, your cash flow and balance sheet, credit profile, overall debt, and ROI are crucial factors in being approved for a business loan. But even if you’re confident in that area, you may still be unsure if you should apply for a loan. Here are some reasons why your business may benefit from a loan.
- Expansion or relocation: If your booming business has outgrown its initial space, you’re probably considering making more room for your customers or opening another location. Either way, a small business loan will help you finance this move. Make sure your finances are up to date, and your ROI covers the costs of your loan, of course.
- Get more equipment or technology: You may decide to get more equipment or inventory to keep up with demand — perhaps it’s the holiday season! Maybe you need to update the technology that handles transactions, finances, research, and tracks inventory. If you don’t have the money up-front to support either need, a small business loan is a great resource.
- Build credit to qualify for a larger loan: If your business is just over a year or if you need to improve your personal credit, you can build your business credit by starting with a short-term loan.
- You’re getting started: As a new business owner, covering starting costs can be more manageable when you borrow extra capital.
At Evolution Capital Group, we can guide you on the loan that best fits your business’s financial and growth needs. Make sure you schedule a free consultation with our experts today!