Important things to consider before using a business loan

Most businesses 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

Only borrow money when there is a clear purpose of the loan and a plan for how the money will be used to grow the business. It can be to finance purchases, invest in property 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 the repayment period you choose will affect the total cost. Borrow only as much money as you need and choose a repayment period that suits you and your business. Shorter repayment terms means that you have to make larger individual repayments, but that the overall cost of the loan will be lower.

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Look at the total cost

It's easy to blindly look at the interest rate comparing business loans, but there are many other aspects that play into the cost of the loan. Invoice fees, setup fees and administrative fees are things that can have a big impact on the total cost. It's also important to check whether the interest rate that's presented is an annual or monthly interest rate. Make sure you know the total cost before you take out the loan so you don't get an unpleasant cost surprise later on.

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What repayment rate is right for your business

There are different ways to pay off a loan, and it's important to look at your business's revenue stream to choose the option that works best. For example, if your business has mainly daily sales through card transactions, amortization in smaller amounts on a daily or weekly basis may be appropriate as it does not affect the liquidity 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 off the loan in advance. 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.