Applying for a business loan from a bank isn’t a step to take lightly. Obtaining bank financing can help your company advance to the next stage of growth, whether that’s opening a new office or store, offering a new product or targeting a new customer demographic. But it is essential to know what you’re getting into and what will be expected of you before you apply for a bank loan. Here are a few questions to ask to see if bank financing is the right option for your business.
1. How Much Can Your Company Borrow?
Before you approach a bank about a loan, it’s essential that you have an understanding of how much you need to borrow and whether that amount is a figure you can comfortably borrow. To determine the size of the loan your company needs, take a look at your business’ cash flow. You’ll need to have enough revenue coming in or have the potential for enough revenue to come in before you choose an amount to borrow.
It’s a good idea to have as much information as possible to provide to the bank before you apply for the loan. You don’t want to guess at how much you’ll need to borrow. It won’t look so good for your business if the bank determines that the requested loan amount is too small or too large based on your company’s actual cash flow.
2. Does Your Company Qualify for a Loan?
Not every company qualifies for a loan from a bank. Banks use a number of different criteria, from the credit history of a business, the credit score and history of the business’ owners and the cash flow of a company, to determine if a company is going to be a safe or risky borrower.
Even if your company has been in business for years and has a strong credit history and business credit score, a bank might want to look at your personal credit history and your personal finances before it decides to loan money to your business or not. For that reason, it’s important that your own credit be in great shape, not just the credit of your company. If your business is a new business, having a great personal credit score becomes even more important.
3. How Will You Repay the Loan?
A bank will most likely want to see proof that you can pay the loan back and that your company will pay the loan back based on the payment plan you agreed on. When you apply for a loan, it is a good idea to include a plan for paying the back the amount you are borrowing with the application. The plan shows the bank that you have thought the process through and that you will be able to make payments based on your company’s current cash flow.
Another thing worth considering, although you might not want to, is how the loan will be repaid if your company folds or if something should happen to you or another owner of the business. It’s a good idea to have a back-up plan in place in case the worst or the unexpected happens.
4. What is the Cost of the Loan?
Loans aren’t free money, so it’s important to understand the full cost of any money your company borrows. Typical loan costs include the interest rate charged as well as any fees. Another cost to consider is the prepayment penalty. Although many loans do not charge an extra fee if you pay off the loan early, it is possible for some loans to include a penalty if you decide to pay early.
5. Have You Fully Explored Other Options?
A bank loan isn’t your only option when it comes to getting financing for your business. It helps to fully weigh the pros and cons of all your options before deciding which direction to take. Your company might be at a stage where getting capital from an investor is the way to go, or you might be at the phase where options like crowdfunding are more appropriate.
If your company is carefully considering financing, but isn’t sure where to turn or how to get started, the team at New Direction Capital can help. Contact us today to learn more about how our virtual chief financial officer services can help your business.
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