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Do's and don't before applying for a term loan

Sunday, May 9, 2021

A term loan is an ideal choice of borrowing for business owners. The loan is available for any business purpose and has long and flexible tenure. It is usually applied for capital expenditures like purchasing an asset or to expand into a new market. If you are looking to apply for a loan for your business, there are certain things you need to keep in mind. Let’s go through some of the do’s and don’ts before you proceed with the term loan application.

Do’s

1.        Your homework

It is your job to compare lenders and understand the terms of the loan. Even if two lenders offer the same type of loan, you need to compare them and choose the right one. A lender may have a higher interest rate while the other may offer a higher loan amount. You should not apply for a loan with the first lender you come across. Compare them and then make the decision.

2.     Check the credit score

The lender will check your credit score and make a decision based on the same. If you have a high credit score, the chances of loan approval are higher. There is a minimum credit score requirement with many lenders and it varies by the type of loan. You must get hold of the credit report and check your score before applying for a loan.

3.  Estimate the exact amount of funds you need

You must be aware of how much funding you require so that you do not end up with a lower amount. It will also save you from the prepayment fees if you pay the loan before the end of the term. You must know where you want to use the funds and have the exact amount in mind when you apply for a term loan.

Don’ts

1.           Overestimate the income

Whenever you apply for a loan, you will have to agree on an EMI amount or provide a projected income statement and balance sheet of your business. Never make the mistake of overestimating the income. The lack of income in a business can put your business off ground. Create a budget and be very logical about the income. You can also reduce the estimated income by 15% or 20%.

2.   Underestimate the expenditure

A business can have all sorts of expenses and no matter how meticulous you are, there are some things you will have to pay for. Just like the income, never underestimate the expenses. You can increase them by 20% to 25% when you make the projected financial statements or agree on the EMI amount.

3.    Set aside extra funds

You cannot totally depend on the loan amount to run your business, you must have some savings to make sure you can pay the bills as they arise. Even if it is easy for you to get the loan, you need to set aside some funds to make the repayment on time. Further, lenders will not be keen on lending money if you cannot repay the term loan.

Keep these do’s and don’ts in mind before you apply for a loan for your business.

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