Five factors to consider when taking out a small business loan

A business loan comes as a boost to the business, enabling it to finance its expenses as well as expand its operations. There are factors the lender considers to determine whether the loan application successfully gets the applied loan. The business owner ought to have an understanding of these factors before making loan applications, as they act as guidelines for accuracy in the whole process.

  1.    Credit worthiness

The Credit worthiness of a business is the measure of the possibility of a borrower not to default in repaying their loan. Their credit history, as well as the credit score, are used in assessing creditworthiness. A high credit score indicates a higher credit worthiness. An individual who meets their debt obligations has a good credit history, which makes them have a higher credit worthiness.

  1.    Lender options

Lenders are divided into two groups, traditional and nontraditional lenders. Traditional lenders consist of banks and credit unions. They offer lower interest rates and friendly repayment terms, though this comes with strict credit, collateral, and cash flow requirements. They also require several financial documents, like the debt schedule, financial statements and tax returns.

Nontraditional lenders offer loans at higher interest rates, they make fewer demands for documentation from the borrower and their underwriting procedure is short. They are most proffered by businesses with low credit worthiness.

  1.    Amount required

The amount of money the small business is applying for is dependent on the why behind the loan. Reasons for the loan may be financing the acquisition of an asset, expansion or financing recurrent business expenditures. A budget showing the estimates is a good convincing tool to the lender. The budget should be reasonable as overestimates and underestimates cause the lender to question the owner’s credibility. Financial projections through income statements and cash flow statements are expected.

  1.    Lender requirements

It is the whole process a business owner will be required to go through in pursuit of a loan, including the legal formalities they will have to meet. A lender may want to ascertain the presence of the business license, article of incorporation, contracts with other parties, leases, and franchise agreements.

  1.    Cash flow level

Cash flow is the cycle existing between cash inflows and outflows. Cash flow is affected by components such as the accounts receivables, payables and credit terms. An easy way of computing cash flow is comparing unpaid purchases to total sales at the end of the month, higher unpaid purchases compared to total sales shows the possibility of a cash flow problem, as more money will be spent the following month compared to what will come in.

Cash flow is increased when prices are increased, assets, goods, and services are sold more and when payables are made slowly and receivables quickened.

Cash flow shows a company’s solvency but does not necessarily reflect the higher profits in the business. It, however, projects the ability of a business to cater for its loan obligations.

Categorized as Business

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