5 things that everyone should learn before applying for a business loan
Financing industry can be very complicated if you’re a first-time borrower. All the jargon they throw at you can be overwhelming for you if you don’t do proper research about the procedures. If you’re looking to borrow some non-bank capital, then you’re in for a tricky game. There are several types of working capital products such as invoice factoring, cash advances, equipment leases, small business loans, and many more.
How do you choose the right type of products?
Additionally, there are several types of companies to choose from, such as marketplaces, broker, lenders and many more. If it’s not already complicated, then there are hundreds of financing providers. Finally, it all gets down to the question, How would you choose from all these options?
How do you know if your financing provider is really working out in the best interest of you but not against it? What if you have chosen a financing provider who induces you into an expensive debt cycle your business may never be able to come out of.
Enough of all these confusing and scary questions. After thorough research and study, we’ve concluded it down to five very important things that everyone must consider and think about before taking a loan or cash advance. Make sure you think through these things and ask your financing lender any appropriate questions. Don’t even think of neglecting these things, because the alternative finance industry is filled with predatory sharks who’re there just to get your money. So, if the following factors don’t match up with a financial lender, just back away and go to someone else.
A direct lender or a broker
It’s the first and foremost thing that you should decide about in the process of taking a loan. If you’re lucky enough to find an honest broker, then you can get all the help needed from them regarding the alternative business lending. As we all know, the best things are harder to get. So is the case with finding a good broker for your alternative loan. Most of the brokers try to get you into a lending scheme from which they can get good commissions. What does it mean to you if you get into such a scheme? A disaster!
Don’t let it scare you. It doesn’t mean all the brokers are there to ruin your business or run away with your money. You just need to be careful while going the way of taking a loan through brokers. With proper due diligence and research, you can find out a good and honest broker that works in the best interest of you. Make sure that you’re aware of the amount that the broker is getting as commissions. The reason for this is, whatever the amount that the lender is paying the broker as commission, make your loan expensive.
Our suggestion - There are several tools or services that you can make use of while researching about the brokers. Some of them are Better Business Bureau, TrustPilot.
Cost of the loan, inclusive of the fess:
There are tons of loan types out there with different variations. Some of them are Short-term loans, mid-term loans, equipment leasing, SBA loans, and many more. Not all of them are offered with uniform cost metrics. Annual Percentage Rate is usually the most commonly used cost metric; it can’t be applied to all the products, especially the non-credit products.
Ask your financing provider if they’re providing the interest rate or the APR. If they don’t provide the APR, ask them for an equivalent. Interest rate only provides the information about the rate of interest for a specific time period. Make sure that you ask your financing provider clearly about their model. If you don’t have the knowledge about APR, then you may get some hidden costs along with the usual interest rate. Before signing up any paperwork, be aware of all the fees that may be inclusive of your plan.
Default on your financing:
Many of you may not even want to consider this scenario because no one wants to be in such situation. However, it’s better to safer than sorry, isn’t it? For people who don’t know what a default in the financing industry means, it’s the situation where you couldn’t fulfill the terms of the loan. Usually, many financing providers require a guarantee by you which can get tricky sometimes. Read all the terms and conditions carefully, the best thing to do is consult a lawyer and have them with you while dealing with the agreement.
One important thing to do is to know the difference between a cash advance and business loan. If you take a business loan, you owe the money and are liable for it regardless of your business success or failure. But in the case of a cash advance, you’re only held accountable for the money if your business is a success.
Situations where you’re in need of extra cash:
If you’re going for a short-term financing plan, then this is a very important situation that you need to evaluate. If you need more money, you can’t just simply go back to your finance provider and ask for it. Unless you have already paid half or more of your loan, you can’t get more money from your funder.
A very important thing here is to know about the ‘double-dipping’. It is a situation where you’re given additional capital and eventually gets forced to use that money from next loan to pay off the overall balance. Double-dipping increases the cost of a loan and seriously affect your business. Ask your lender if they’re double-dipping at the time of a renewal.
Paying off the loan or advance early:
‘No prepayment penalties’ and ‘early repayment discounts’ are the two most important terms that you need to learn about if you’re considering to pay off your loan earlier. You can pay off the loan advance early if the loan is labeled with the no prepayment penalty. In the short term financing industry, you need to know the term ‘fixed cost’. Instead of accumulating the interest on a periodic basis, several money lenders use fixed cost contracts to let you pay a specific amount when the outstanding amount is being paid.
By now, you have read all the important things and question you need to ask while taking a loan or a cash advance. Be careful and do your due diligence all along the process of taking a loan. Be safe and sound when it comes to financial matters.