The Do’s and Don’ts Of Taking Out a Loan For Your Business

If you want to launch or expand your business, you can either save up money and finance it yourself, or take out a loan. It’s obviously ideal if you have the money already or can save it up quickly, but that’s not always realistic, especially when time is of the essence.

A business loan can be a great solution when it comes to funding your business. There are a few do’s and don’ts to keep in mind when you borrow for your business, though.

Do: Build a Solid Financial History

The better the financial profiles are for you and your business, the more loan options you’re going to have. You’ll also be able to secure more favorable loan terms, including lower interest rates, which could save you thousands over the term of your loan.

You can build both your own credit score and your business’s credit score by paying bills on time and using credit cards to pay for expenses, without letting your credit utilization exceed 20 to 30 percent.

Don’t: Get Overly Optimistic About Income and Expenses

Your budget and your business plan are both important parts of the business loan application process. When you draw up your budget, make sure that you’re being realistic regarding how much money your business can make and how much it will need to spend. This is an area where many business owners overestimate how much they’ll make and underestimate expenses.

Do: Look into Multiple Financing Options

There’s no shortage of financing options available for businesses, although what your business can get will depend on your financial situation. There’s the traditional bank or credit union loans, which have strict requirements but typically have the lowest interest rates. There are microloans through Small Business Association (SBA) lenders. You can go online with an online lender or a peer-to-peer lending marketplace. Consider all your options to find the one that is best for your business.

If you’re confident in your ability to pay off what you owe within about a year, another option to consider is a 0-percent APR business credit card. As long as you pay off the balance by the end of the introductory period, which is usually 12 months, you won’t pay any interest.

Don’t: Get a Loan with a High Interest Rate

Depending on your financial situation, you may not be able to secure a loan with as low of an interest rate as you’d like. Don’t rush it though and obtain a loan where you’ll be paying sky-high interest rates. There are plenty of lenders out there offering short-term loans that are easy to obtain, but can trap you under a mountain of debt. A payday loan and a car title loan are two of the most common examples of these types of loans. Generally speaking, if it’s a loan you pay back in weeks instead of years, it’s probably a bad choice.

Do: Have a Strong Business Plan

There are two reasons you should have a strong business plan ready before you apply for any business loans. The first is that without a strong plan, it’s highly unlikely for your business to be successful. If you don’t know what you’re doing, more money isn’t going to help you figure it out. The second is that any reputable lender will want to see your plan before loaning you money.

Don’t: Apply for Too Many Loans

It’s okay to compare loan options, but one thing you want to avoid is building up too many hard inquiries on your credit report, as this will lower your credit score. Ask lenders what type of credit check they’re going to perform before you authorize it, and limit yourself to two or three hard inquiries, at most.

A business loan could be just the boost your business needs. Just keep these guidelines in mind during your search for the right loan.