Business Loans For Self-Employed Individuals: 7 Factors To Consider
Growth and expansion are vital moves of any business.
For a self-employed person who cannot access salary-backed credit facilities, there are various options available in the market if you’re looking for working capital.
Financial institutions may offer you loans, but before you sign the offer letter, you must consider the following factors to avoid getting into any bad debt:
1. Type of Loan
Different lenders offer various business loans for self-employed people.
These include Small Business Administration loans, invoice discounting, equipment financing, credit cards, merchant cash advance, lines of credit, and term loans.
With these choices, it’s important that you consider a loan that best suits your business needs.
2. Loan Repayment Period
Assess if the lender’s repayment terms meet your expectations. Make sure you agree to the repayment schedule you can comfortably adhere to and commit to regularly.
The monthly repayment installments should not strain your cash flow. Besides, being late on your monthly repayment installments or late payments can negatively affect your credit score, affecting your future loan applications.
3. Collateral
Some lenders insist on collateral as opposed to unsecured lending for businesses.
Collateral is your personal asset that you allow the bank to hold on to. It’s supposed to act as loan security. If you default on the cash advanced to you, they can sell it off to recover their money.
Find out what collateral your financier requires and the terms and conditions involving such financing, then weigh if it’s a risk worth taking.
4. The Institution’s Reputation
Research on the organization’s reputation. Avoid lenders with several negative reviews and low ratings. If you spot any of the following signs while looking for a business loan, tread with caution and start looking for other financing options:
- If the lender does not have a known physical establishment or company website
- If the lender does not have a pre-set minimum credit score, or if they do not consider your credit score to lend you money
- If the lender has ambiguous charges or is unwilling to disclose the amount the loan facility will cost you in the long run
- If the loan sales representative is in a hurry to make you sign the offer letter while you are still undecided
Such deals may look convenient at first, but they can be risky in the end. These deals can be costly compared to other loans from other institutions.
Hence, consider a lender with good customer relations. You want to learn how they deal with delays, customer disputes, and the loan recovery process.
5. Interest Rate
Check if you can negotiate with your financial organization for a better interest rate.
A lower credit score is likely to attract a higher interest rate. Compare the different interest rates available in the market and go for the lowest rate available.
6. Fees Charged
Having your collateral appraised can attract extra charges on top of the standard loan charges.
Some firms charge exorbitant loan processing fees, loan application fees, or origination fees. Some will even charge you to process your credit report. So, ensure you ask about all these fees and other hidden charges before you take up the loan.
Get information about the annual percentage rate (APR). The APR will show you the exact total cost of the facility, including any fees charged.
7. Processing Time
As a business person, you can be pressed for cash sometimes, especially if it’s for inventory or some special equipment.
Thus, make sure the lender can process your loan in good time. Otherwise, the loan will not make any financial sense if delayed. If the approval time exceeds a few weeks, look for alternative funding sources for your business.
Takeaway
While business loans for self-employed may be good, it’s crucial to analyze your business needs first. Moreover, consider your cash flow to avoid future problems while repaying the loan. In addition, make sure you use the loan for the intended purpose. Don’t take a business loan unless it’s necessary, and have a clear plan on how you’ll repay it.
Lastly, do not be in a rush to take a loan until you’ve demonstrated that you are comfortable with the loan repayment terms and conditions before you accept it.
Shop around for a lender with the best terms in the market. Financial institutions can be ruthless when following up on defaulted loans.
As such, you want to be sure you repay the monthly installments promptly, so you don’t lose your collateral. Furthermore, talk to your lender beforehand in case of delayed remittances and discuss recovery options like a loan restructuring.
