Are you considering applying for a personal loan to fund your Startup or new small business?
Loans carry risk for both the lender and the borrower. Unwise borrowing can have disastrous consequences on your Start-Up’s financial future and your own. It is our opinion, that it is never good idea to be in anyone’s debt – we recommend CrowdFunding as a safer option. However, we understand that people can sometimes make things work – so here are three tips to use if you are considering taking out a loan.
*Please note that this Article is not to be taken as Financial Advice*
1. Know your Budget Inside Out
Before you apply for any type of loan, make sure your budget is watertight. It should be detailed and meticulous. Make sure you know exactly how healthy your finances are and what funding from a successful grant application will be used for exactly. Determine how much your business will need to make monthly to pay back the loan. Use your budget to determine what amount you can safely afford to payback monthly. Calculate how long it will take to pay back the cash, including the interest.
Whatever amount you choose to go forward with, you will want to be absolutely sure that you are capable of fulfilling what the lender will require. Lenders will call in what they are owed. They are not known for showing flexibility, once you have agreed terms & conditions you are responsible to honour the agreement or face the penalties of not doing so.
Tip: The application process will call for full financial disclosure so having your budget worked out ahead of time will make filling in the paperwork easier!
2. Explore All your Options
Start researching & comparing! This will help you to find the best of what is available. Gather references from business acquaintances and others you can trust. Avoid run-of-the-mill payday lenders as they are famous for sneaky clauses that surprise the borrower. In addition, their interest rates often border on extortion.
Don’t Limit yourself to Banks
Look further than your personal bank and explore the options offered by other banks. Remember to assess options from other institutions that may offer lending such as non-profits or foundations that support small businesses. Also check out government agencies such as the South African Department of Small Business Development that may have loans you qualify for. If your credit history is watertight you may be eligible for peer-to-peer lending which is yet another option.
Tip: Take a closer look at business credit cards that may be available to you. Depending on your credit score you might be able to access a credit card that allows flexible spending and repayment and boasts of an interest rate close to zero.
3. Apply for the Best, Not All!
It is a good idea to complete your research, then decide the best option for you before you actually begin applying for the loans you want.
Did you know that if you just apply for every loan available it could damage your credit score?
This is because loan applications consist of what is called a ‘hard inquiry’ into your credit history. These in-depth inquiries are registered in your credit history and can lower your score if they are included in the credit agencies calculations (and they usually are).
The Next Step
Loans can make sense and might be necessary to push your Start-Up forward but take them on with caution, seek wise council, and use wisdom in what type and amount of debt you sign-up for.
Read Loan’s explained Part II for loan-vocab, how loans are calculated, and how to stay protected from hidden loan dangers!
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