10 Things to Consider Before You Apply for a Short Term Business Loan
There’s no doubt that a short-term business loan can provide your venture with the boost in finance it needs. From hiring additional staff to cover busy periods to purchasing extra stock and upgrading your business’ equipment; all of this and more is possible through the extra working capital a loan provides.
Before you apply for a short-term loan though, there are some things you’ll need to consider first. Today, we’re going to discuss these important elements to ensure you get the most suitable short-term loan for your business. Let’s get started!
Secured or Unsecured?
Once you decide you need a short-term loan, you’ll have to determine whether it should be secured or unsecured. A secured business loan requires collateral (a valuable asset) to ‘secure’ the loan, whereas an unsecured loan does not. Secured loans can be riskier for applicants than unsecured loans, as it means that your asset (such as your home or car) must be sold to pay off your debt.
Do You Qualify?
Many lenders are upfront about their short-term loan requirements, so you’ll want to double-check these first to see if you can actually apply. Just some of these requirements may include how long your business has been in operation, whether or not it’s registered within your country of residence, and how much money your business makes on an annual basis. Just keep in mind that alternative lenders are more lenient than traditional lenders, so will usually require less documentation from your side.
The Size of Your Loan
Another important aspect of a short-term loan is how much you actually need to borrow for your business. It’s best to first determine how you will use your funds (for example, for marketing, paying staff wages, moving to another location, etc.), as this will give you a good indication of how much money you need to borrow.
We mentioned collateral in the point above, but the type of collateral you may have to use is also an important thing to consider before applying for a loan. What valuable assets do you own that you can use to secure your loan (should you need to)? And how will this affect you if you were unable to repay your loan?
Depending on your lender and whether your short-term loan is secured or unsecured, your credit score may play an important role. This score (or rating) has been determined by your ability to make timely payments in the past. You can usually check your credit rating once per year for free through your country’s credit bureau.
Traditional or Alternative Lender?
Speaking of lenders, have you decided whether you want to apply for a short-term loan through an alternative or traditional lender? A traditional lender is a financial institution such as a bank, whereas an alternative lender is someone aiming to disrupt the traditional model of finance (and instead, making it accessible to a wider population). Be aware that traditional lenders can take weeks just to approve your application and give you access to your funds, whereas an alternative lender can have you approved and with your desired funds in as little as 1-2 days.
Interest rates will vary, depending on the lender and type of loan. This is an important factor to take into account though, as your interest rate will largely determine how much your short-term loan repayments will be. Shop around first to get the best deal, as you want this figure to be as low as possible.
Your repayment schedule determines how often you make your repayments, as well as how much they will be. Your lender should be upfront with you about this, to begin with, but it’s best to first get this in writing before you sign off on your loan. Usually, repayments will occur on a weekly or monthly basis with a short-term business loan, often over a period of 3 to 12 months.
Terms and Conditions
When you apply for a short-term loan, you must be prepared for a number of terms and conditions. Ensure you go through each of these carefully, and if in doubt, ask for clarification from your lender or another trusted financial professional.
Some lenders don’t believe in charging hidden fees, whereas others won’t be so upfront. Just some of these fees might include origination, appraisal, underwriting, administration, processing, and credit report fees. Before you sign off on your loan, be sure that you’re aware of any additional charges, as this can greatly affect your total repayment amount.
There you have it – our list of 10 things you should consider before applying for a short-term business loan. How can a business loan help your venture? We’d love to hear from you in the comments below!