Do s and Don ts When Applying for a Business Loan

Do’s and Don’ts When Applying for a Business Loan

When starting a business, it may seem like there are a million things to think about.

Top of mind for most entrepreneurs? Financing their business.

A business loan can provide capital, but navigating the loan options can be difficult for small business owners. SBA loans, conventional bank loans, online working capital loans, and peer-to-peer loans are a few types available.

To make things easier, here are five pointers to consider when searching for a business loan.

1. Limit the number of loans you apply for

When starting your search for a business loan, avoid applying for too many loans, as it can hurt your credit score. Qualify for two or three options you’re likely to qualify for. Ask lenders about their credit check policies.

2. Understand the cost of the loan

Lenders describe loan costs differently, making comparison shopping challenging. Ask for the Annual Percentage Rate (APR) to compare loan options. Keep in mind that a low APR isn’t always better.

3. Be wary of prepayment penalties

Prepayment penalties are fees that lenders charge if you pay off a loan early. Read the loan agreement carefully to understand the penalty before signing.

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4. Choose between a line of credit and a traditional loan

A business line of credit may be a better option than a loan, depending on your business needs. A line of credit offers flexibility and allows you to pay interest only on the funds you use.

5. Understand which assets are at stake if you can’t pay back the loan

Lenders often require collateral, a lien, or a personal guarantee to secure a business loan. Understand what assets are at risk if you’re unable to repay the loan.

Bottom line

Obtaining a business loan involves careful consideration. Seek trusted advice and ask your lender questions before committing. Understand the terms, commitments, and costs associated with the loan.

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