A bank loan is the most common form of loan capital for businesses. The loan is based on the value of the said business/collateral and its potential ability to pay off the loan. If you are considering taking out a bank loan, whether to expand your current business, to purchase equipment or purchase inventory, for example, here are some things to consider before doing so.
Consider if the Loan Will Generate More Revenue.
You should avoid getting a loan if you see your business being in the same state six months to a year down the line. For example, are you simply taking out the loan for payroll? Business owners should only consider getting a bank loan as a means to allow them to grow their business and thus generate more revenue. Having to take a bank loan to simply make ends meet could be.
Ask Yourself If You Will Qualify.
This should be one of the first questions to ask yourself when considering taking out a bank loan. This is important because if in case you apply and are denied, your credit score will be negatively affected. This can make it difficult to take out loans in the future, among other potential problems.
To avoid this, look into the specific requirements of the bank loan with the appropriate institution before applying. In addition, also look into your business credit score as well as your personal credit score. A bank will assess whether or not you get approved based on both.
Consider That Banks Will Value Assets Lower Than What You Think.
It is important to realize that banks generally only give a percentage of the value of a particular asset. For example, because you purchased a piece of equipment for $100,000 doesn’t mean that you will be able to borrow that same amount. You should consider this when planning how much you will need.
Consider How Much You Need.
You should have an idea of how much you need and how you will spend the funds prior to applying for the bank loan. It will look poor if it turns out you actually need more money than what you originally applied for. In order to figure out how much you will need, a monthly cash-flow projection is a good way to determine the amount.
Consider The State of your Business/If You Can Repay The Loan.
Part of assessing whether or not you can repay the loan comes down to whether or not you have sufficient cash flow. Ensure that you have financial projections ready for your financial provider and to include your repayment plan in the projections as well. Also consider that you may be denied the loan if your projections are very tight.
Bank loans can help your business grow, but if taken out at an inopportune time, they can just as easily have negative repercussions on your long term finances. For more information, contact the Kevin Thatcher team today.