Did you know that 40 percent of small businesses in the United States get a loan at some point? While getting a loan shouldn’t be the first choice and can be avoided in some circumstances, there are easy mistakes that can be avoided, with the right advice.
So, what are the things owners of small or medium-sized businesses should consider when it comes to financing? Here are five tips on securing an SMB loan from an accountant’s viewpoint:
1. Need or Greed?
Small business owners are sometimes impatient. When you are an owner of a small business, that business is much more than just a source of income. It is your pride and joy, and you want to see it grow as fast as it can.
In an effort to jump-start a new era in their business endeavors, oftentimes small and medium businesses take a loan. At the time it seems like a reasonable option to get an influx of cash needed to tackle the projects that you want.
But any good accountant will tell you that in business, patience is a virtue! Hustling through rough times with what you have and not overreaching will pay off in the years to come.
Even if you think you’ve made a conservative estimate of how much you’re going to earn in the time to come, and you feel like you’ll have no problems meeting your payments, be careful.
If you’re not in a dire need of a large immediate investment, consider putting aside the amount you’d pay for your loan monthly instead of jumping into a long-term loan.
2. Length of a Loan
It’s not only the amount of your loan that will set you back; time is also of the essence. The length of a loan is crucial for two reasons:
- It is correlated with the amount you end up paying in interest. Generally speaking, the longer the loan, the more interest you pay. However, that might not always be the case. Before you decide on a loan, be sure to get professional advice. Talk to your accountant and ask him or her to calculate which loan length will work best for your situation.
- To get a loan, you usually have to offer a collateral. For the period that you’ll be paying back the loan, that collateral is on the table – if you can’t keep up with your payments, the collateral will end up being taken away.
Some fees will be unavoidable, and even those aren’t cheap. So, be mindful of the fact that the cost of the loan won’t be only the interest.
Some of the fees that people don’t usually consider are:
- Application fees
- Credit evaluation
- Loan processing
- Appraisal of the collateral
Don’t be scared to shop around and even to negotiate a little. Dig up the cheapest loan you can.
Also, ask about prepayment penalties. They can be pretty steep. If your business ends up doing much better than planned, with a high prepayment penalty on your loan, you might not get anything out of paying up in advance.
4. Adjustable Rates
Long-term loans are usually divided into two parts: a fixed-rate period and an adjustable-rate period.
For example, a 2/28 system is a 30-year loan where you’ll have a fixed-rate payment for the first two years, while the other 28 will be adjustable (sometimes called floating).
With adjustable rate, interest will be dependent on the fluctuation of the financial market, and if you’re not an economics expert, there really isn’t a way for you to predict how it will behave.
You should consider paying higher interest if that loan has a longer fixed-rate period or if it has a reasonable limit for the adjustable-rate interest.
Currently, it is predicted that the interest rates will rise in 2017, but the financial market is agile and things change quickly. Much quicker than the time you’ll need to adjust to the new situation.
5. Be Smart, Be Careful
Probably the best advice an accountant can give is to be alert. Don’t be greedy, don’t be scared of the authority of the person on the other side of the counter, think things through, and get professional advice.
In an attempt not to be seen as impolite, people shy away from expressing their concerns. If you’re being pushed into loaning more than you need, if you’re not given copies of all documents, if they are asking you to sign any blank documents, simply turn around and leave.
Don’t be scared to just walk away. There is plenty of fish in the sea, and if you’re dead set on getting a loan, you’ll be able to find something suitable.
Please, keep in mind that getting a loan is a serious business. Small mistakes could set your business back for years to come. Getting professional help is always advised, but keeping on your toes might prove to be even more crucial.