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Entrepreneurs who are successful in their business are generally not looking for the extra money. And those who are in difficulty and could use a little boost may not be eligible for some small business loans. That being said, when is the perfect time to apply for and take out a business loan?
Benefits of taking out a small business loan
Let’s start by explaining why you would want to take out a business loan.
Sometimes you have a hard time making ends meet. This is especially true for seasonal businesses, which may have more revenue in some months and less in others. These slack periods can make it difficult to pay for your business expenses. Taking out a bank loan can ensure you have the cash you need.
Another benefit of business loans is how they can help increase your credit. Borrowers who pay their loan repayments on time each month may be able to increase their credit rating. Lenders like banks, credit unions, and other financial institutions report your payments to credit bureaus, which helps you build a positive credit history.
Depending on the interest rate you qualify for, sometimes your business financing options can be incredibly affordable, especially if you qualify for an SBA loan from the US Small Business Administration, which offers some of the lowest interest rates. lower available.
You can also take advantage of introductory zero percent interest rates with business credit cards. This means that you can invoice what your business needs without paying any interest, usually the first year. If you have a reward card, you can also earn reward points that you can use for travel, cash back, and gift cards. Win-win!
When to get a business loan
The question is therefore: when should are you applying for a business loan? The answer may surprise you: Take it out when you have good credit and you’re not desperate for money, when the cash flow is strong. The better you can meet lender eligibility criteria, the lower your interest rate and the more loan options you will have. This may not be the case when you are struggling to pay your bills.
Plan ahead for the financing you will need later. If you don’t want a lump sum money right now that you’ll need to start paying off your loan right away, like a term loan for working capital, consider a line of credit because you can borrow on the line. whenever you need, let it be a little bit now and a little bit in a few months.
Many loans require personal collateral, so make sure you are in a location where you feel comfortable making the collateral. If you are required to provide collateral or a down payment, you should prepare them before applying for a loan.
Another good time to apply for a loan is when looking to purchase equipment or real estate. There is special equipment financing that you can qualify for when the equipment you buy (or real estate) is used as collateral, which can help you get a lower rate.
When NOT to get a business loan
Wait until you can no longer afford to pay your employees is not time to take out a loan. It may be too late to avoid the liquidity squeeze that is likely on the horizon. Another reason not to wait for things to go wrong is that you’re less likely to be able to repay a loan, and lenders will see this and see you as a risk to lend to.
If you’ve been running a start-up or new business for less than two years, you may want to consider waiting to apply for a loan, as many banks want you to have an established business that has proven to be stable.
If your business and / or staff have bad credit scores, this might not be the best time to get a loan. Your personal credit history plays an important role in determining whether you qualify for financing from many lenders, and others research your business credit scores. Therefore, if these are low or if you have not yet established trade credit, consider investing the time and energy in doing so in order to qualify for great financing options. Keep tabs on your credit report and watch your credit grow when you pay your bills on time and reduce your debt.
The caveat with bad credit is that certainly you can still apply for financing from some lenders online, but be aware that you may not be able to get an unsecured loan with a low annual percentage rate. If you absolutely need the cash now and are willing to pay a premium, consider cash advances or short term loans to traders and plan to pay them off as quickly as possible to minimize the interest you pay on this type of loan.
Another time to NOT get a business loan is when you can’t make the monthly payments. If you are strapped for cash, how will you be able to add the monthly repayment to your budget? You risk defaulting on the loan if you cannot make the payments described in your repayment terms.
Also beware of taking more than you can handle. You may be approved for a larger loan amount than you needed, and it might be tempting to take the extra, but be aware that this will come with a higher monthly payment and you will pay more interest. on a larger loan.
Business financing for your needs
Smart small business owners take out financing before they need it. They carefully monitor their business and personal credit to maximize the best deals based on their scores.
This year, plan ahead. Plan for larger expenses you might have in a few months, such as buying equipment, hiring employees or expanding your office, and find the financing that suits your situation.
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