5 Things to Consider Before Getting a Short Term Loan: A Guide for Small Business Owners
Opening and maintaining a business these days has become more difficult and complicated than it used to be. After all, more things can influence its growth. That’s why business owners have to do more than they used to in order to be successful.
But despite their efforts, many businesses end up not growing. What’s even worse is that most startups and small businesses close down a year or two after they’ve been launched.
The biggest reason for a business failing is, of course, a lack of access to adequate funds.
After all, if you can’t get sufficient funds when you need them, you won’t be able to cater to your business’s needs. You also won’t be able to boost your operating capital and ensure continued growth.
Recent ABS data shows a significant increase in personal loan lending in Australia, reflecting a trend where borrowing has become more common in our debt friendly society. The market offering personal loans is diverse, with options available from big banks as well as alternative lenders, giving borrowers a wide range of choices. In this environment, it is important to carefully consider all available options before taking on additional debt.
That’s why people turn to small business loans to finance their operations and avoid closing down.
There are a lot of financing options available to businesses these days, with each catering to a different type of need. But you’ll only know the perfect loan for you if you know what exactly to look out for.
And in this article, we’ll talk about the five key factors to consider before applying for any type of small business loan.
Step 1: Understand Your Business Needs
Before you apply for a personal loan to support your business, it’s crucial to take a close look at your current financial situation. Start by reviewing your income, expenses, and any existing debts you may have. Understanding exactly why you need to borrow money—whether it’s to consolidate debt, cover unexpected costs, or invest in a new opportunity—will help you determine the right loan amount and ensure the loan is suitable for your needs.
Your credit score is another key factor to consider. A strong credit score can help you secure a lower interest rate and more favorable loan terms, making your monthly repayments more manageable. On the other hand, if your credit isn’t in great shape, you may face higher interest rates or less flexible loan terms. By knowing your credit standing and financial goals, you can make a smart money decision and choose a personal loan that aligns with your business objectives and your ability to repay. To better understand how a business loan may affect your credit, it’s important to stay informed before applying.
The 5 Key Loan Factors to Consider
When exploring personal loan options for your business, keep these five key factors in mind: interest rate, loan term, loan amount, fees, and repayment schedule. The interest rate directly affects how much interest you’ll pay over the life of the loan, so it’s important to compare offers and look for a rate that’s fair and competitive. The loan term, or how long you have to repay the loan, will influence your monthly repayments—short term loans may have higher payments but less interest payable overall, while longer terms can lower your monthly outlay but increase total interest.
Choose a loan amount that matches your needs without overextending your finances. Be sure to review all fees and charges, including application fees, early repayment fees, and late fees, as these can add up quickly. Finally, make sure the repayment schedule fits your budget and cash flow, so you can pay on time and avoid penalties. Consider whether a fixed rate means predictable payments, or if a variable rate loan could offer savings if rates drop. Decide if an unsecured loan is right for you, or if you’d prefer the security of a secured loan. By weighing these factors, you’ll be better equipped to find a personal loan that supports your financial goals and keeps your business on track.
The 5 Factors
Factor #1 – Loan Amount
Of course, before you take out a loan, you must know exactly how much you need to borrow. To do this, it’s wise to obtain a few estimates for the costs of your planned business projects or expenses so you can accurately determine the required loan amount. And coming up with a figure requires you to identify the need you want to meet in your business.
Lending institutions often have several loan options for small businesses. And each loan type is tailored to different needs and is structured in a different way. But sometimes, they have to be utilised in a manner that’s already stipulated by the lender. It is also important to know that these loans have varying borrowable amounts and interest rates.
So, don’t take out a loan unless you have a good idea of how much you need to borrow. Only borrow the exact amount of money that you need to avoid getting swamped with the repayments, not to mention being burdened by the interest.
Factor #2 – Interest Rates
As soon as you apply for a business loan, interest payments will become a major part of your monthly outflows until you’re done repaying all the money.
Know that interest rates could be fixed, variable, or a combination of both. It’s important to compare the average rate for similar loans—typically around 10% to 11% per annum—and consider whether the interest rate offered is fair. Variable rates may start low but can increase over time, which can affect the affordability of your repayments. You must know the exact interest rate your business can cope with. This way, you can avoid jeopardizing your profits with high-interest loan repayments and other loan fees.
Keep in mind that higher loan amounts are often accompanied by higher interest rates. So, while borrowing large amounts of money might be tempting, consider if your business can handle the monthly repayments that come with them.
Balance the pros and cons of the loan vis-a-vis the interest rate. If care is not taken, these repayments could cause your business to struggle or even close down eventually.
Factor #3 – Duration of Repayments
Apart from having varying interest rates, lending institutions also offer varying repayment periods. And oftentimes, these two go hand-in-hand.
Usually, you’ll be offered different durations to repay a loan – it can be six months, a year, etc. And each duration will have its own interest rate. Take note of these durations and their interest rates and be sure that you are capable of making the payments.
After picking the exact duration you need to repay the loan, make sure that you take out the loan only during the period that is specified.
And finally, always ensure that you pay back your loans within the approved time frame. Be sure to know the due date for each repayment and check if your lender offers a grace period, which can give you extra time to pay without penalties. This way, you’ll avoid unnecessary interest outflows. It’ll also stop your business from doling out more money than necessary for loan repayments. Avoid letting a short-term loan turn into long term debt, as prolonged debt obligations can lead to higher costs and financial strain.
Factor #4 – Processing Time
Small business loans have different processing times based on the type of loan and who the lender is. So, if you need money urgently, you need to know which loan to apply for.
While applying for a new loan can be a way of accessing cash quickly, it’s important not to be tempted by the idea of easy cash without fully considering the implications and your ability to manage repayments.
Also, knowing a loan’s average processing time can give you an idea about when to apply to ensure you get the money when you need it. But you can also consult with relevant financial entities to speed up the processing period, especially if you need the money urgently.
You can also cut down on a loan’s processing time if you know all the documents required for it and prepare them beforehand.
Factor #5 – Penalties
No one wants to default on loan repayments. However, situations could arise that can make you miss a payment period. As you know, most lenders have penalties in place should this happen.
Missing a payment could lead to heavier repayments for some lenders. For others, they may increase the interest rates on future repayments. Meanwhile, there are also lenders who may require that you pay punitive fees.
So, watch out for the penalty clauses in each loan.
Although you don’t wish to default on the loan, ensure that you can handle the penalty charges should it happen. Consider what would happen if your circumstances changed, such as a loss of income, and make sure you have a savings buffer or certain insurances in place to help cover repayments during difficult times. If you have trouble accessing funds to make a payment, contact your lender as soon as possible to discuss your options. Do note that you can also negotiate with the lender to make the penalties bearable for your business.
Manage Debt and Credit Responsibly
Once you’ve secured a personal loan, managing your debt and credit responsibly is essential for long-term financial health. Make all loan repayments on time to avoid additional interest and late fees, and keep your credit utilization low to maintain or improve your credit score. Regularly check your credit report to ensure there are no errors and to track your progress.
If you have multiple existing loans or debts, consider consolidating them into a single loan with a lower interest rate to simplify your finances and potentially reduce your monthly repayments. Always have a plan in place to pay off your loan, such as setting up automatic payments or creating a detailed budget. Responsible debt management not only helps you avoid falling into a financial hole but also positions you for better deals and more flexible personal loan options in the future. By staying proactive and disciplined, you can achieve your financial goals and build a debt-friendly foundation for your business.
Get The Perfect Loan For Your Business
Access to funds is a crucial requirement for the growth of all businesses. And one way to get money for your business at the appropriate time is via small business loans.
But before settling down on a loan, take note of the five factors mentioned in this article. This goes a long way in helping you select the perfect loan for your business.
And if you need further assistance, Unsecured Finance Australia is here to help. Contact our specialists today for personalized advice. Apply online and you can receive your approval within 24 hours.
Find out more by taking a look at our unsecured business loans. Remember to compare offers to ensure you get the best deals for your business needs.
