Points to Consider When Taking a Small Business Loan

Business loans are often the oxygen of a thriving enterprise. The money can be used to finance new equipment, buy inventory and materials, hire and train new employees … the list goes on.

But the key to good credit -- and access to loans -- is making your payments. So it’s essential that you don’t make the mistake of applying for a large loan without carefully considering the future first. Any business is vulnerable to unforeseen difficulties when it comes to making payments, especially if the loan you’re thinking about comes with a high interest rate.

So before you take a loan, it’s crucial to write out a business plan that includes a highly detailed breakdown of the funds you need and how you intend to use them. This will help you avoid unnecessary spending -- or borrowing an amount that’s more than you need.

Additionally, don’t forget the many risks involved in running a small business, particularly in today’s economic climate. If you borrow too much too soon, what will happen if things don’t go as you plan? What if you don’t make as much profit as you anticipated? When considering a loan for your business, you should certainly hope for the best, but, more important, prepare for the worst.

The U.S. Small Business Administration has even created a checklist of questions you should ask yourself before seeking out a loan. For example, do you really need more capital, or can you manage with your existing cash flow? If you’re always paying your suppliers late, for instance, it’s probably a strong sign that you need more working capital. Also, how great are your risks? Is your business in an industry that is growing quickly, or is it in one that has been particularly hard hit by the economic downturn? Remember that the greater your risks, the greater the costs associated with your loan.

Before applying for a bank loan, also make sure you examine alternative types of financing. You might consider a loan from a government-sponsored program. While the process may take a little longer, you can typically expect to be granted a loan with a low interest rate and easier repayment terms. For more information on what is available and how to apply, visit the U.S. Small Business Administration’s website.

Regardless of the source of your loan, keep in mind that there are federal and state laws that protect business owners from lenders that charge very high interest rates. Also, be sure to do your homework when it comes to the rates and costs associated with your loan. This will ensure that you choose a lender whose program not only fits your needs today but can help you grow your business in the future.