Mastering Loan Agreements: 5 Strategies for Grasping Small Business Loan Terms

Mastering Loan Agreements: 5 Strategies for Grasping Small Business Loan Terms

Small business loans are a welcome relief for companies that struggle with cash flow issues. Whether a startup or an established firm, these financing mechanisms can be a lifesaver when you need quick capital to fund unforeseen expenses. 

However, there are several lending terms to contend with when looking for small business loans. Understanding the applicable conditions makes it easier to find a suitable lender, determine your eligibility for the loan, and assess whether you can service the borrowed amount.

In this article, we’ll look at the five strategies to help you grasp small business loans. The tips run the full gamut, from understanding the different types of small business financing to highlighting some practical loan repayment techniques. 

1. Know the Different Options Available

One of the surest ways to grasp small business loan terms is to understand the options at your disposal. 

Small business loans fall into many categories. Examples include term loans, SBA loans, equipment loans, invoice financing, etc. 

Familiarizing yourself with the various small business loan types can improve your chances of qualifying for the funding. Note that most lenders only process loan applications that spell out the borrowing intent. 

Understanding the available loan options also ensures responsible spending. It prevents you from channeling the funds to non-business expenditures. 

You’ll also realize that each loan type’s small business loan terms vary. For instance, invoice and equipment financing are generally subjected to less rigorous eligibility criteria than commercial real estate loans. 

2. Differentiate Between Secured and Unsecured Loans

Secured loans require putting up a valuable asset known as collateral as a security for procuring the funding. They’re also known as collateralized loans. 

Secured small business loans are easy to obtain, provided that you have an asset to collateralize. Many lenders won’t review your company’s credit history or annual revenue. That’s because they have something they can quickly liquidate if you default on the loan. 

Collateralized loans also attract reasonable interest rates and repayment periods. But then again, that depends on the small business loan you’re applying for. 

Unsecured loans, also called uncollateralized loans, are preferable for startups that may not already have valuable assets to collateralize. They’re also quite easy to obtain for borrowers with impeccable credit scores and high annual revenues. 

Conversely, unsecured small business loans often come with stringent borrowing terms. Many lenders charge exorbitant interest rates and impose shorter repayment periods. You’re likely to also qualify for lower amounts compared to secured loans.

3. Research Lenders Carefully

Small business lenders aren’t hard to come by. However, extensive research is paramount in finding a creditor that suits your needs. 

First, you’ll need to pick between mainstream lending firms (such as banks and credit unions) and unconventional lenders. 

Banks provide higher lending amounts since their funds are insured. They also charge reasonable lending rates, which the Federal Reserve regulates. 

However, banks perform extensive background checks before advancing credit facilities to small businesses. Ensure your credit rating is 700 or higher before pursuing this option. If your company isn’t operational, you must present a compelling business plan to qualify for a bank loan. 

A choice would be to borrow from cash apps and peer-to-peer (P2P) lenders. Since these entities typically operate outside mainstream financial regulations, you can access funding even with a poor credit score. It’s also easier to negotiate better rates when borrowing from relatives, friends, and other P2P lenders. 

After finding what promises to be a suitable lender, evaluate your loan eligibility. 

Complete the process by checking the lender’s fees. Pay particular attention to closing fees, which include origination & underwriting fees, broker commissions, insurance premiums, and applicable taxes.  

4. Prioritize Loan Repayments

As you plan on spending a recently approved business loan, it’s equally important to start prioritizing repayments. 

Making timely payments can improve your credit ratings significantly. It also cushions your business assets from seizure if you end up with a delinquent (defaulted) loan. 

One way to repay your small business loan is using the 50-30-20 budgeting tool. In this formula, 50% of your business revenue goes toward needs, 30% toward wants, and 20% toward savings. 

Loan repayment constitutes a need. So, it’s one of the expenses covered under 50% of your revenue. 

You might also consider making extra payments. This allows you to repay the loan sooner, minimizing default risks.

5. Consider Refinancing or Debt Consolidation 

Loan refinancing refers to taking out a new loan to repay one or several outstanding ones. It essentially entails renegotiating the terms of an existing loan. 

Loan refinancing is ideal, where a lender revises the terms of your current loan, such as reducing the interest rates and monthly installments. It allows you to repay the remainder of your small business loan at more favorable rates. 

Debt consolidation follows more or less the same concept. 

The difference is that with debt consolidation, you aren’t renegotiating the terms of an existing loan with the same lender. 

Rather, you may choose to obtain financing from a different lender to pay outstanding small business loans and debts.

The Bottom Line

Getting a reliable small business lender is challenging enough. However, servicing the loan is even harder without a robust repayment plan. The above-highlighted tips will not only come in handy when seeking financing for your small business. You can also implement them to ensure timely loan repayment.

Also Read: Optimize Your Loan For Better Financial Management With A Personal Loan EMI Calculator

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