Considering a loan to survive? Here's what you need to know before getting healthy debt
Oftentimes, the word “debt” causes warning bells to chime in people’s heads. What others might not consider is that debt isn’t confined to a single category—that’s why there’s good debt and bad debt. Even American businessman and financial author Robert Kiyosaki believes that you have the chance to get higher returns when you use other people’s money.
If getting a business loan is something you’re considering, here are a few things to keep in mind before signing over the papers.
Search for government subsidies that fit your business and industry
As a business owner, you’re eligible for various types of loans and subsidies. However, not all these loans will serve your type of business. For example, you’re a service-based digital marketing agency. You won’t benefit much from equipment loans or real estate financing in this case.
However, what might work for you is getting invoice financing during a slowdown of cash flow caused by inconsistent client payments. This ensures that you’ll have a continuous income stream to support manpower and recurring payments for software.
Also consider the latest government programs that offer enough grace periods. Make sure the loan you plan to take can accommodate your business’ cash flow strategy.
Avoid capitalizing on the interest’s payment
There’s loan interest and then there’s capitalized loan interest. When you take a loan, the responsibility of paying, both the money required to acquire the asset and its interest, on time lies on your shoulders.
Reimbursing the funds is one thing but when you defer payments for the interest, there’s a chance that it will eventually snowball into an amount that’s even bigger than your intended loan. Before signing the papers, make sure you’re confident that the interest rate is within your means.
Don’t go into debt if you don’t have a solid plan
Many entrepreneurs will highlight the importance of having a business plan to ensure that you’re not straying from your business goals. The same thing applies to debt. Before even considering a loan, make sure that you’ve already decided on where to allocate the borrowed funds.
Be cautious of taking on a loan just to tide over the company as this can be a one-way road to being in debt for years. A good kind of debt increases your net worth. If the loan has no future value, it depreciates and it’s considered bad debt.
Keep this in mind as this is one of the things a lending company will look for when considering your application as it gives insight into your ability to repay the loan.
Explore different banks and institutions
Speaking of interest rates, take a second look at the institutions you plan to borrow from. The interest rate of each bank differs from the other and that’s one factor you should consider.
You may also opt to not put all your eggs in one basket and explore non-traditional sources. One good example is debt crowdfunding, a form of funding where you borrow from a group of investors and eventually set up regular payment schemes with interests afterward.
There are multiple options present in the market that will help in funding your business and additional research is a must to determine which best suits your needs. In this case, crowdfunding can be considered as a business won’t have to go through an arduous process of getting approved. However, raising the money may take awhile—not the best option if you need immediate access to funds.
Consider the reason behind the rate provided
From the cash reserve ratio set by The Fed to the anticipated market inflation, there are many factors affecting interest rates that are outside your control. However, the lender will also base on your business’ status before dropping a number.
Investopedia explains pretty well how one becomes a subprime borrower—a thin credit history with little to no action and a score below 670—making their application high-risk.
This then causes their interest rates to skyrocket. For a reduced interest rate, ensure that you have a good personal credit score beforehand and that your business has a proven track record of profitability before applying for a loan.
When it comes to building a business, good debt can open opportunities that were previously financially inaccessible for many entrepreneurs. In times of financial crisis, applying for a loan may be the only thing that helps your business stay afloat.
But taking on a loan can be a huge responsibility that prompts any entrepreneur to take a few factors into consideration. To make sure that you’re taking in a healthy kind of loan, business growth should be at the forefront of your decision. Look at your loan as if it’s your key to unlocking opportunities, knowing that the potential value outweighs the debt price.
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