Five Precautions to Take Before You Apply for a Business Loan

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Every business suffers from cash flow issues and most of the time, borrowing from lenders is generally the only recourse for some financial reprieve. You need a business loan to keep your business operating and growing but the financing ought to be sustainable. You should look for lending sources that can give you money at competitive rates. Before you begin shopping for a business loan, there are certain precautionary measures that you should take as business debt must be absorbed in a structured way.

Do a stress test on your financial profile

How much risk can you absorb? Financial advisors generally recommend that borrowers should think like lenders before they take up debts. Loan requirements will differ slightly from one lender to another but there are certain fundamentals that they look for when assessing whether you are a risky or a safe borrower. Can your business generate the cash flow that will pay back the loan? Are you creditworthy? Do you have any security that you can hold up against the loan? Talk to an accountant Melbourne expert to help you work out your capacity to absorb the amount of debt that you are seeking before you begin filling your loan applications.

Evaluate your options

If you are running a good business, you will always have plenty of options of accessing financing. There are lots of possibilities that you can you utilize to access funds so you should take your time to compare each of these and pick the right one that will be the most financially advantageous. Don’t be afraid to take up debt. 30% of Australian businesses do it. However, you should be wary of taking up bad debt.

Have a list of the possible lenders and run a comparison to determine where you are likely to get the best bargains. This is important because certain lenders are not necessarily set up to offer you the kind of financing that you are looking for.

Have a borrowing plan

Before you take up debt, ensure you have a solid borrowing plan. Review your business plans and decide where you will invest the funds for maximum business returns. How much income do you expect to generate? Will your business income meet your loan repayment obligations? Reviewing your business plans can help you work out how much money you can borrow. If you have a solid business plan with accurate financial projections, you will know if you are biting more than you can chew which is always a recipe for financial disaster and even bankruptcy.

Look at your credit report

This is really a no-brainer because the lender will look at it anyway. However, it is important that you go through it in advance and plan around it. Almost all lenders will assess your credit history and determine whether you are a trustworthy borrower. Before you send applications for loans, ensure that your credit profile is in good standing and there are no errors that might dim your chances of accessing debt on good terms.

Have an alternative source for financing

Businesses generally take up debt with the expectation that the injection of money is going to turn around things and that the strong income generated will help offset the cost of the loan. Sometimes the turnaround might take longer than expected and if the lender is not offering you flexible payment terms, it might be prudent to have an alternative means of meeting your loan obligations such as some collateral. However, the collateral should be chosen with some prudence. Don’t wipe out your asset base in your bid to meet your loan obligations.

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