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Things to Consider Before You Get a Business Loan
You are a small business owner and have determined you need a loan. But unfortunately, not all business loans are created equal. We see this scenario quite a bit. Some of the commonly asked questions I get include the following:
- How should I evaluate whether a particular loan option is a good idea?
It all starts with how you are going to utilize the loan proceeds. If you are investing in people, technology, or equipment, business owners need to forecast how that investment impacts their cash flows. Once you have a good sense of how much cash flow is available for debt service payments it is much easier to assess which loan options make the most sense for your company.
- What factors should I look for in a loan proposal?
Aside from getting the lowest interest rate, some other factors to look at include; closing fees, annual fees, financial reporting requirements, covenant requirements, collateral requirements to support the loan, default and cure provisions, and whether or not personal guarantees are required. All of these additional factors can be a drain on your business or personal resources. Like most business decisions, it is always good to look at three or more lender proposals and compare options.
- How can I identify whether a company is legitimate?
The internet is littered with lenders—Lendio, QuickBooks, Blueacron, Womply, etc etc. The best advice is to do your homework. Referrals are usually the best option, but you can also consult with your business advisors (attorneys or accountants). Other good resources include other business owners, business agencies and local government economic development counsels.
- What about all of the government loan options, both COVID-related and otherwise? Are these generally better bets than bank or online options, and why/why not?
Government loan options certainly can offer lower rates and extended payment terms, but in certain situations the qualification requirements are overly burdensome and time consuming. If you need to access capital quickly, keep in mind that many government loan programs take significantly longer than traditional banks. I have many clients with SBA loans but keep in mind that not all lenders are SBA qualified. Grants and other community loans are also a good option worth investigating. COVID related loan programs have been a saving grace for many small businesses, but most programs are coming to an end. State and local government agencies are a good resource when looking for what options are available to small businesses.
- What are common mistakes I should avoid?
The biggest problem I see is small businesses taking on too much debt for their business. My biggest piece of advice is to be very conservative with your revenue or cash flow forecasts and always have a “plan B”. Unforeseen global or economic events, that are too countless to mention, can render the best of plans unsustainable and unfortunately not all lenders will accommodate missed debt payments or other loan defaults.