Last updated on August 6th, 2023 at 06:47 am
At a point in your entrepreneurial journey, you may need to approach financial institutions and other money lending firms to borrow to implement business ideas or for personal use.
There are questions to ask yourself and provide convincing answers to before applying for a business loan, this article examines the things to consider beforehand.
You could take a loan to buy cars, sponsor your kids’ education, buy houses, and expand your business. Whatever your reasons are, what are the things to consider before taking a business loan? Do you just walk straight into a banking hall to submit an application for a loan?
Why am I taking this loan (purpose)?
How much do I need?
Money is necessary to explore more business opportunities and for personal needs to be realised.
When such needs arise here are the cardinal questions you need to provide answers to
What’s the purpose of the loan?
The first question you ask yourself is: Why am taking a loan? Do I really have to take a loan to get things to do? What are the alternatives? Can I get a business grant?
What are the other means of financing instead a loan?
Are there alternatives like approaching family members, friends, or a cooperative society with little or no interest?
For instance, the purposes of personal loans can include covering an emergency expense and financing a large purchase. In one of our publications, personal loans are categorized as unsecured loans which come with interest.
If your credit score is good, you shouldn’t have a problem accessing a personal loan.
The good part is: that the approval process is generally pretty quick with no worry about collateral.
Bottom line: Knowing the purpose of your loan would help you in using it for the purpose it is meant.
What’s the loan amount?
If $10,000 would be enough to take care of the situation, there is no need to take $15,000. There is no point in increasing your debt profile. Stick to the purpose.
Most times, the good your credit score, the higher the amount you can take, but don’t be lured by the money lender’s gimmicks.
In some countries, you can take up to $50, 000 or more loans provided you have a score of 760 or higher.
Which financial institution is startup-friendly?
All financial institutions have considerations for a startup business, but research has shown that some of them are more accommodating to startups than others, especially in developing economies.
Check with the banks in your country. Ask friends who have applied for credit facilities before. They are most likely going to tell you what their experience is like.
Will I be able to repay within the time frame?
Would you be able to pay within the time frame? What other sources of funds do you have to settle your loan within the time frame?
In making sure to don’t default, it’s advisable to choose the most feasible time so that your credit score isn’t affected.
For instance, if you’re taking a payday loan, don’t set a two-week repayment time for yourself if your salary would not come in by the end of the month.
Some organisations pay the fourth day of another month, put this into consideration. Don’t put yourself under pressure that is avoidable.
Will I be able to pay the principal and interest?
Your ability to repay the principal and interest over the repayment period is very important when taking the loan.
The ability to pay is called “capacity,” in banking. The lending institutions have a lot of factors they use to determine if a borrower would be able to pay the principal and interest.
The principle is the actual amount you applied for while the interest is simply the “gain” the lender is making from granting the loan.
One of the things the lender uses is your income and cash flow.
Which financial institutions grant business loan requests?
If it’s an online loan, read their T & C. If you have a good credit score, you could get a discount on repayment and a fair interest rate compared with its competitors.
If you’re taking a loan from banks, the lending process involves a series of activities that lead to approval or rejection.
Most times, you have to have an active account with the bank before you could access their loan.
Do I have the collateral for the loan?
Collateral is an asset or property the lender can legitimately use to recoup its money in case the borrower defaults.
It’s a security and used as a way to obtain a loan, acting as a protection against potential loss for the lender should the borrower default in his payments.
The secured loan comes with collateral, which becomes the property of the lender to compensate for the unreturned borrowed money.
In Nigeria, for instance, if you take out a loan of N500,000 from the bank, you may use your car (which is worth N1,000,000) as collateral. If you failed to repay the loan, your car will be seized by the bank, based on the two parties’ agreement.
Do I need a legal practitioner to interpret the terms and conditions of the loan?
You are bound by law. That’s why it is very important to take your time to carefully read the terms and conditions before ticking the “I Agree” button.
Because borrowing money is a huge financial commitment, which is why a formal process is in place to ensure a win-win situation.
The terms and conditions contain the amount of money borrowed, the interest charged, the repayment plan, collateral, late fees, and penalties for default.
A loan agreement isn’t exclusively to protect the lender but protects both sides if the matter goes to court. It allows the court to determine whether the conditions and terms are being met.
The loan agreement is proof that the money involved was a loan and not a gift. It could involve a law enforcement agency in case of default.
Things to consider before taking a loan can be summarised as:
- Clearly define the purpose you want to take a loan
- Don’t take more than you need to fix a situation
- There is no point in increasing your debt profile
- Choose the best repayment time frame
- Pay attention to the interest
- Choose the bank or money lender with the fair interest
- Collateral is needed for a secured loan while it isn’t for a personal loan
- Carefully read the terms and conditions before signing