Starting up a business is never easy and the lack of funds has always been a worrying thought at the back of a business owner’s mind. For an established business, this is hardly a problem. For a new business, this could be an issue, especially when the start-up capital is low and the operating expenses are high.
Reasons for getting a business loan
There are many reasons for getting a business loan and these can include: not having enough cash flow to cover operating costs, expansion of the business through purchasing of inventory, equipment and assets, to increase the working capital, or even to build up the credit profile of the business in preparation for a bigger loan in the future.
Banks vs finance companies
In the market today, there are typically two kinds of financial institutions that business owners borrow from: the bank or a financial company. While they may offer the same type of funding, a bank will conduct a stricter company profiling that may require collateral, thus offering a lower interest rate. While a finance company may not necessarily be lax when it comes to such checks, they may typically offer you funding options even if the bank has rejected your application.
Why borrow from a finance company
If the bank has rejected your application for a business loan, fret not as you can still approach a financial company that offers business loans. The only downside of it is that the interest rates they are offering will definitely be much higher that what the banks are offering. This is to cover the risk of lending. In some cases, they may offer unsecured lending (which does not require pledging of collateral). Some reasons for a bank loan rejection could include having a bad credit score, not having sufficient collateral, or even having a business in a risky industry such as money lending.
Other charges and interest rates
Finance companies normally have an interest rate that is much higher than what the banks are offering, due to the risk that a business may default on the loan. They may also have hidden fees and charges that are not stated up front, and are packaged inside the loan amount. You may have to ask for a breakdown of all the fees and the repayment period in order to better understand how much you are paying. For an easier understanding, approach the company’s representative and ask how much is the monthly repayment over a period of time, on the principal amount borrowed.
Learning how to manage your debt and making the repayments on time is of paramount concern, as you would want to build up a good credit score for future loans. Decide how much you are able to repay each month before you commit yourself to a loan, as you do not want the business to be inundated with debts that cannot be repaid. It is always prudent to save up and utilise the cash before turning to a loan, if you feel that your business does not have the potential to expand in the initial stages.