A business loan is a type of financing for businesses to help them grow and expand. It is a sum of loan taken out from a financial institution and it has a set of repayment schedule.
A business loan can be applied for in hopes that it will provide the capital needed to start or expand a business, buy machinery or equipment, pay off debt, or finance ongoing operations.
There are several factors that play into whether getting approved for a business loan is possible such as the applicant’s credit rating and the amount of collateral they own. Here are few to consider:
#1. Not checking the interest rates
Before you go ahead with your business loan application, it is essential to check the interest rates. Interest rates on business loans can vary from one company to another and that is why it is important to compare them before you decide which one suits your needs.
It is also a good idea to check the credit scores of the companies. This will allow you identify which lender will be a better option for you.
#2. Overestimating the company's worth
Nowadays, many entrepreneurs are looking for ways to get an estimate of the company’s worth. Entrepreneurs need to know how much is their company worth.
There are various methods that can be used to estimate the company’s worth. The most popular methods that are used by entrepreneurs include:
- Discounted cash flow method
- Comparable companies analysis
- Liquidation value method
- Discounted future earnings method
#3. Not having collateral
Not having collateral can cause a lot of headaches. For one, it's a major factor that lenders use to determine your eligibility for a business loan. Lenders will want to know that you have enough money in the bank or other assets to cover the loan if it were to go into default.
Collateral is also important because it can help with identifying your credit score. If you have collateral, then your credit score will be less likely to fluctuate wildly and go up and down too much. Loans without security are called Unsecured loans.
Some examples of assets that are considered as collateral include any kind of real estate holdings, automobiles, jewelry, stocks and bonds, or precious metals like gold or silver bullion
#4. Not understanding the full terms of the contract
When getting a loan, it is important to read the entire contract and understand the implications of loans. If we do not, we will be in financial trouble when we cannot pay back the loan.
We should go through every clause of the contract and make sure that we understand each part of it before signing on. We should also know exactly when our payments will start and how much they will be in order to make an informed decision when applying for loans.
