Almost every business requires financial assistance at some point, especially during the vulnerable start-up phase. If you are thinking about getting a bank loan for your business, here are 10 things you should think about beforehand:
1. Interest Rates: Usury laws in the various states prevent lenders from hiking their interest rates illegally high. However, there can still be a lot of variance between the interest rates charged by various banks. If you want to make sure you get a good interest rate, look at current trends and compare rates before deciding which bank you want to get your loan through. You should also know if your loan will come with a fixed or variable interest rate.
2. Secured or Unsecured Loans: Secured loans are tied to a piece of property or equipment that is used as collateral. When you have a secured loan, the creditor is legally able to take the collateral from you if you fail to make your payments as agreed. Unsecured loans are not tied to collateral, and creditors cannot take anything from you due to lack of payment unless they receive a court judgment.
3. Collateral Requirements: If you are applying for a secured loan, it is important to understand what type of collateral the bank requires. Banks usually require the homes or real estate properties of small business owners to be used as collateral in a secured loan. If you sign for a business loan in which your own property is used as collateral, you become personally liable for the debt.
4. Bank Fees: Before signing any loan agreement, watch for pyramiding late fees, attorney’s fees and any other fees that seem suspicious or unnecessary.
5. Personal Guarantees: Some banks require a personal guarantee from the business owner when extending a loan. This is a written promise from the business owner or an executive guaranteeing that they will pay on the loan if the business fails to pay. Signing a personal guarantee on your business loan could allow your property (both separate and jointly-owned) to be eventually seized for lack of payment.
6. Cosigners: Some banks may require a cosigner to sign on a small business loan. This helps give the lender peace of mind that if one individual does not pay, they can still collect from the cosigner.
7. Term Loans Versus Lines of Credit: A term loan allows you to have access to a lump sum of borrowed money up-front, then pay it back over a specified period of time (referred to as the “term” of the loan). Business lines of credit, on the other hand, are more like your personal credit cards. They give you access to a predetermined amount of money, but you do not need to make any payments unless you use the money.
8. Loan Maturity: One of the most important things you should know about a bank loan before signing is when it will mature, or come due.
9. Repayment Terms: Some loans are set up with affordable equal monthly payment installments, but making the minimum payments may leave the borrower with a large balloon payment at the end. Other loan repayment terms may contain an acceleration clause that allows the lender to declare the remainder of the balance due if you miss a payment or violate your loan agreement. Still other repayment terms may charge a penalty for prepayment of the loan.
10. Document Requirements: Different banks may require that you submit various documents to them throughout the term of the loan. Be sure you understand what documentation is required before singing a loan agreement.
Before signing any bank loan agreement, make sure you first think about these 10 items, and make sure you fully understand the terms of your agreement.
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