Important things to consider before using a business loan

Most companies need to inject external capital occasionally. Here are six tips on things to consider before taking out a business loan.

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Purpose of the loan

Borrow money only when there is a clear purpose of the loan and a plan for how the money will be used to grow the company. It can be to finance some purchase, invest in a new premises or to hire someone. If you borrow money without a clear purpose, it means that your company incurs unnecessary costs.

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Loan amount and repayment period

How much you borrow and the length of repayment period you choose will affect the cost. Borrow only as much money as you need and choose the repayment period that suits you and your business best. Shorter payback period means bigger mortgage repayments but lower cost.

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Look at the total cost

It's easy to stare yourself blind at the interest rate when taking out a business loan but there are many other aspects that play into the cost of the loan. Posting fees, hidden fees and reminder fees are things that can have a big impact on the total cost. It is also important to check whether the interest rate presented is annual or monthly interest. Make sure you know the total cost before you take out the loan so you don't go on a price shock afterwards.

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What amortization rate is right for your business

There are different ways to pay off a loan, and it's important to look at your company's revenue stream to choose the option that works best. For example, if your company has largely daily sales through card transactions, amortization in smaller amounts on a daily or weekly basis may be appropriate as it does not affect the cashier too much. If you are paid by invoice instead, larger monthly repayments may be preferable.

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Possibility of early repayment

Needs can change over time, which is why it is important to ensure the possibility of paying back the loan ahead of time. With a loan with no commitment period, you can choose to repay the loan early if you no longer need it. This way you can lower the cost of the loan.

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Do your research

Review your options before taking out a business loan. Compare different lenders to see which one can give you the offer that best suits your business. A tip is also to see what other customers think of a lender by reading reviews on Trustpilot, for example.