05/ 23/ 2007
In order to take your business to the next level or perhaps even begin to get it off the ground, you may need to take out a loan. Here are a few things to do as you proceed:
Be sure
While going into debt is sometimes necessary, it shouldn't be taken lightly. This is especially true for college students, many of whom are already carrying student loans and varying amounts of credit-card debt. If you can find feasible ways to grow your business without applying for a business loan, consider exhausting those options first. For example, if you typically have money left over from your student loans each semester, this could provide a good source of funds.
Also, make sure that the calculated risk is a good one. At this point, does the interest your business has generated justify taking out a loan? If you're hoping to secure a loan to start a brand-new, untested business, double-check your market research. Are you fairly confident that you'll be filling a unique need for customers and will make enough profits to pay back the loan?
Decide if you need a cosigner
If you proceed with your loan application, you might need to find a cosigner. This will likely be the case if you have no assets, such as a house, a small monthly income or bad credit history. If you have a business partner, this person is a fairly obvious choice, as long as he meets eligibility requirements. If you're going it alone, you could ask a parent or a close family member to be your cosigner, but be aware that they may turn you down: some people simply don't like to mix business and family. Make a list of potential cosigners before you begin asking.
Shop around
As you would with any other major purchase, do a little research on what loan option would work out best for you. Compare the annual percentage rate (APR) of several loans to see what is reasonable. Among those with the best APR, compare repayment plans and the amount of time you have to pay back the loan. Note any other differences in the terms and conditions.
If you're planning to apply for the loan through the bank where you keep your checking account, you have more options than you're currently considering. Sometimes credit unions offer better deals than commercial banks; if you're in school, and your college has a credit union, you are likely eligible for membership and possibly a loan. Other small-business owners prefer to secure Small Business Administration (SBA) loans through the government. Among other options, the SBA offers loans to businesses that only need to borrow a small amount. These microloans, as the SBA calls them, are a manageable option when you're just starting out.
Make sure you understand the terms and conditions
Once you decide on a loan and are approved, ask your creditor to walk you through the sections of your loan agreement. Most of them will do this regardless, but don't be afraid to tell them to slow down or go back over any clauses that were unclear. Go over your payment schedule, the amount you'll owe each month, default policies and so on. Ask if there are any special loan fees, such as penalties for early repayment. Don't sign until you're absolutely sure of what's required of you.
For many small-business owners, taking that first business loan is the first step in making one's dream into a reality. It's also a serious financial commitment that can be hard to keep up during a business' lean periods. So if you're entering into any agreement, educate yourself about the risks and benefits and get the opinions of the established entrepreneurs whom you admire. Take time with your decision, even if you're anxious to take that next step. After all, one of the most important virtues a small-business owner can cultivate is patience.
