There are many different ways for your business to borrow money, whether through:
- Term loans;
- Lines of credit;
- Government-backed loans;
- Merchant cash advances;
- Invoice factoring loans; or
- Other alternative loans.
However, whatever loan you choose, at the end of the day, you need to have a good idea of exactly what kind of purpose your loan will serve so that you can get small business loans that are right for your specific needs.
In this e-book:
We’ll take a quick look at the three most important factors that you need to take into account when choosing the right business loan for you:
- The amount of money you need,
- The term of the loan and
- The interest rate.
The Amount Of Money You Need
Determining the amount of money you need before you apply for a business loan is absolutely critical.
For this, you need to clearly define the purpose of the loan, whether it’s for:
- Expansion purposes;
- Working capital;
- The purchase of new equipment;
- The purchase of additional inventory;
- Debt consolidation; or
- Other purposes.
Pro Tip #1: Never borrow money for something that is not well defined.
Knowing the specific use of the funds before you apply for a loan will help you ensure that you choose the appropriate kind of loan and that you don’t overborrow or underborrow.
Pro Tip #2: Never borrow more money than you need.
It is important that you borrow as little as possible to cover your business’s needs so that you don’t end up in excessive debt.
Pro Tip #3: Only borrow what is within your means to pay back.
You should understand exactly how much money you can afford to repay. For this, you should consider all the associated costs that come with a loan, including fees, interest rates, and other charges, so that you can properly calculate the total amount that you need to repay.
The Term Of The Loan
The term of the loan refers to how long it will take to pay it back. It is important that you negotiate with your loan provider to ensure that the term of the loan suits your business cash flow and that it is doable in terms of your business’s overall budget.
If a term is outside of your repayment capacity, your business could end up running into financial trouble.
- Short-Term Loans:
Short-term loans require higher monthly payments, but the upside to this is that the overall interest cost is lower, costing you less overall.
The downside is that this can put a significant strain on your cash flow.
- Long-Term Loans:
Long-term loans offer lower monthly repayments, which gives your cash flow some room to breathe.
However, in the end, a long-term loan will end up costing you more because the interest over the long term tends to add up to more overall, leading to a higher total loan cost.
- Other Costs To Consider:
The loan terms that you agreed to will include various additional costs, such as:
- application fees;
- origination fees; and
- early repayment penalties.
These additional expenses can cause the total cost of a loan to rise fairly significantly, depending on the lender.
The Interest Rate
The interest rate is one of the most important factors to consider, as this is essentially the price that you pay for the money you are borrowing.
Your interest rate will be determined by a few things, with the most important being your credit score.
It is therefore important, before you go out and apply for a business loan, that you know what your credit history is and that you have a good idea of your business’s financials so that you can plan for what you might expect to be a fair interest rate.
Your business finances will also play a key role in the loan approval process, so it’s important that you have your finances in order, in addition to ensuring that your credit score is as good as it can possibly be.
There are different types of interest that might come with a loan, which you should negotiate with your loan service provider. It’s important that you choose the option that aligns best with your business’s tolerance for risk and its financial strategy.
Interest can be fixed or variable.
- Fixed interest rates:
With a fixed interest rate, you can be assured of more stable monthly payments. Fixed interest rates provide more stability and predictability. Although you won’t benefit from interest rate drops, you also won’t suffer from an interest rate spike.
- Variable interest rates:
Variable interest rates may change over time in line with economic fluctuations and government policies. Variable interest rates provide you with the opportunity to benefit from interest rate improvements should they occur. However, the risk of variable interest rates is that they can also rise due to macroeconomic factors beyond your or your lender’s control.
If you are looking to apply for quick small business loans of between $5,000 and $300, 000 to grow your Canadian business, contact us at Rapid Finance to apply today. We will ensure you get the process started in no time!