Before Applying For a Business Loan, Here Are Three Important Factors You Must Consider

If you're an entrepreneur who is passionate about growth, chances are that you will need a loan at one point in time or the other in your quest to become great. Believe it or not, this is the truth. Show me a successful businessman and I will show you a businessman who grew his business by leveraging on loans.

This is why loans are very important, and must not be taken for granted, because they present a business owner with more investment opportunities by making resources readily available.

Unfortunately, during my work as a credit analyst in different financial institutions I have met too many entrepreneurs who blindly apply for loans just because others are also applying for loans. That is purely the bandwagon effect. In this article, I will be discussing three important factors that an entrepreneur must consider before applying for a business loan.

1. Develop a Concrete Investment Plan

Before you set out to apply for a business loan, you must determine your investment plan. Are you investing in the purchase of fixed assets that will improve your productivity? Or do you want to increase your working capital? Or do you intend to invest in both working capital and fixed assets?

The answer to the questions above may appear quite cheap, but I have met several business owners and loan applicants who do not have any convincing reason why they are approaching the bank for a loan. As weird as that may sound, there are many business owners who still make this mistake.

If you do not have a solid investment plan, your chances of diverting the loan becomes high and you may land yourself in serious mess when repayment knocks at the door.

2. Determine the Suitability of the Interest Rate

Most of the loans disbursed to business owners come with an interest rate. If you are lucky, you may find a single digit annual interest rate. If not, you may have to deal with as high as 30% interest rate per annum.

Therefore, it is important that you evaluate and determine the interest rate before picking up your loan. You have to also consider whether or not your profit margin is capable of repaying the loan without putting pressure on your business. This is very important if you care about bankruptcy.

3. Determine the Terms and Conditions of the Loan

Banks are not to be completely trusted when it comes to the terms and conditions associated with loans. Banks generally do have a bad habit of printing loan contracts in small fonts. It is a ploy to discourage potential loan applicants from scrutinizing the loan contracts.

Do not fall for that old trick. Instead, read through your loan contracts thoroughly and seek legal opinion before finally accept the terms and conditions of the loan. The banksters may not like you but you would have safeguarded and protected yourself against ambiguous clauses. Don't be like the naive character who pledged his flesh in Shakespeare's Merchant of Venice.

Conclusion

It is easy for any business owner to approach a bank for loan but it is difficult to beat the banksters to their games and to invest the loan amount wisely to avoid crisis and irregular repayments.