Month: September 2019

Business loans explained

Business loans explained

Thinking of starting or expanding your business and need capital or funds? You can decide to raise the funds from your savings. Or by asking your family members or close friends to loan you the money, but you may not raise the required amount. You can, therefore, opt for a business loan.

A business loan is borrowing for a business purpose. You will be undertaking a debt from a lending institution and pay it back with interest at an agreed point in time.  The loan will cater for the expenses that will arise which the business cannot cater to, this could include rent, salaries, and renovations, amongst others. The lender may need to know what you are borrowing the money for, so having a well thought out business plan will help you secure the loan faster.

How credit scores are affected

Good credit scores will help a lender form the decision whether to give you the business a loan or not. Lenders use Credit scores to determine whether an individual or a business is capable of servicing a loan. It takes into consideration the financial habits of an individual or businesslike, timely credit card payments, bankruptcies, defaults, overspending, the age of the company and size of the company amongst other considerations. The lender will require a credit report to allow them to see how good you are with money. Individuals or business with a low credit score are high risk and are generally avoided by banks.

Lenders make their money by charging interest on the principal amount. Ask your lender whether they are offering fixed or variable interest. As the name suggests, fixed interest means the applicable rate remains constant for the duration of the loan repayment. Variable interest, on the other hand, fluctuates due to market conditions. You may need to consult on which is a better option for you because, for example, fixed interest will be good when the market interest rates go up, on the other hand, if the rates go down, you will lose out on this benefit.  You are better off keeping the loan repayment to the shortest time possible to avoid interest accruing.

In conclusion

Before you apply for the business loan, you need to decide on the amount.  Do not borrow more than you need, only borrow enough to cover your expenses. Consider the duration you want to pay back the loan to avoid high-interest rates and the type of loan you want to take whether fixed or variable interest or secured, which might allow you to pay lower interest, or unsecured.

You may need to personally guarantee the loan in case the business is unable to pay it back. Some lenders have a charge that allows them to seize your assets to repay the loan. Only if you are unable to meet the terms of the agreement.

Finally, read the loan agreement documents carefully and engage a lawyer. Or have a financial specialist walk you through the documents. So they can explain terms you may not understand before you sign on the dotted line.