Questions to Ask Before Applying a Loan
Before we arrange a loan, it is good to think about its terms. That is, how much money do we actually need and how long can we pay it back? And of course this is just the beginning, because there are more potential questions. What are they like? And how do you best answer them?
The maturity period must be carefully considered, you can extend it in an emergency
The deadline for repaying the loan should be fixed. This does not apply, however, that in the event of a major financial emergency, the payment schedule cannot be extended. On the other hand, be prepared, of course, that it will not be free, but for a fee. This may or may not happen. The ideal option can do without such a thing, right? Paying a loan before the deadline is without any problems, for that you deserve a star with a star. But when it’s over, you should pay as soon as possible without any delay.
How much money do you actually need? Don’t borrow more than necessary
You should also fix the amount that your financial situation requires. It is totally irresponsible to borrow more, for example, taking a short vacation. Take only the loan you use immediately and can be repaid in due time. Otherwise the whole situation can be very complex. Most small-business owners need a bank loan at one time or another, and applying for one involves much more than filling out paperwork and saying a prayer. Among other things, you need to consider the state of your personal and business finances, how you’re going to repay the loan, and how much money you actually need.
The stated interest rate is probably not the effective interest rate, especially if interest is compounded daily and the term is less than one year. Origination fees and prepayment fees boost the effective interest rate even higher. Make sure you know how much will come out of your bank account and when.
Ideally, the cash you’re expecting from the project you finance will come in as quickly as you need to repay the loan, which is almost immediately. Using a six-month loan to buy a year’s worth of inventory is trouble, because the revenue from selling inventory will lag the payback period. You can use other cash flow–even the loan itself–to make payments in the very short term, but only if you can achieve cash-flow equilibrium fast.