The American Congress authorized up to $7 billion in March this year as a small business disaster loan. This is a shot in the arm for many small and medium-sized companies that have almost halted operations in the wake of the Coronavirus pandemic.
However, most business owners are still jittery on whether it’s wise to take up such a loan.
Taking out a business loan requires that you look beyond your emotions. Before taking out a business loan, it would help to have these four considerations at the back of your minds.
1. Is the Loan Essential?
What’s the worst that could happen if you forego this loan? Most times, business owners sign on that dotted line on a whim. On second thought, you would probably realize that you can do without the loan.
While loans are critical for boosting your business, repayment isn’t an option. You risk losing your business in case of default. As such, you should only take up a loan if it’s genuinely essential, to avoid putting your business in jeopardy.
2. How Soon Do You Need the Money?
This is a critical consideration for any business because it determines the direction of your borrowing. If you need an urgent loan, traditional banks may not be your best bet. However, quick fixes also demand higher interest rates and shorter repayment periods.
Before taking up a loan, it would be critical to define the urgency. Once you establish how soon you genuinely need the loan, you can then decide on whether such high-interest rates are worth it. You can always consider the more traditional approach if the loan is not a matter of life and death.
3. Consider the Terms Before Taking out a Business Loan
This is where most small businesses miss the mark. You need to read the fine print and consider all worst-case scenarios before appending your signature.
How long is the repayment plan? How much will the loan accrue in the long-haul? These essential questions ought to be at the back of your minds before committing.
Further, it would help to consider your cash flows relative to the loan repayment demands.
This consideration will cushion you against defaulting and ensure that your creditworthiness remains intact. However, the credit terms may vary depending on the types of business loans involved.
4. What Are the Consequences in the Case of Defaulting?
Most times, taking out a business loan requires collateral. Whether the collateral is an asset or part of your business, it’s essential to understand the risk involved in the case of default. Your business may suffer sudden shutdown or incur unrecoverable losses in case of seizure of the collateral.
In other cases, you risk ending up listed with the relevant credit bureaus for non-repayment. If you’re concerned about negative credit history or probable loss of collateral, then you need to reconsider taking up the loan.
You Are Not in Business If You Don’t Have Some Pending Loans
The survival of your business depends on sustained financing. As such, taking out a business loan in case of financial constraints can help keep your enterprise running. However, these four considerations should be at the back of your minds before appending that signature.
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