Should I Take a Business Loan?

At one point or another, your business will require more funding. Whether you are looking to purchase a machine, improve business cash flow, start a business, or even expand your business, loans can come in handy. But at what point should you take a business loan?

Applying for a business is a serious decision that requires careful consideration. It’s important to take a thorough look at your business and see how it can benefit from the loan. In this article, we look at whether you need that business loan and, if so, when you should apply for one.

Should I take a loan for my business?

Whether or not you should take a business loan is an important question to answer. To help you answer, here are some questions you should ask yourself.

What are your business requirements?

You need to establish what you want to achieve and how much you need. Prepare a budget and assess how much your business needs. Research and make the budget as comprehensive as possible.

Is the loan the final funding your business needs, or do you need to look for more funding? The ideal situation is to borrow from one lender.

Is a business loan the best choice for my business?

Consider all the options available to you and see whether the loan is the best choice. Business loans are one of the best forms of financing because they dilute the shareholders’ interests. However, if the loan is not put to good use, it could result in the collapse of the business.

Consider other options like cost-cutting measures, and technology changes, or look for investor funding. You have to review your options and see what works best for your business.

What type of loan is suitable for your business?

Review your business needs and see what the business needs. There are multiple types of business loans available, such as asset financing, overdraft facilities, and many more. Choose the best type of loan for your business.

How much can the business afford to pay per month?

Check and see how much your business can afford to pay back every month. Check the books of accounts and see how much is left after you pay the liabilities. It’s also important to assess the value of taking the loan. What return can you expect if you take the loan?

Get the forecast numbers to see the impact of the loan. This will give you an idea of whether it’s a good idea to take out the loan or not.

Business loans

Reasons why you may take a business loan

Before you take the business loan, you need to establish the rate of return you can expect. Establish whether the loan will help your business flourish or not. Here is why you can take a business loan.

Expand operations

Expanding your business into new locations will help increase revenue and the bottom line. This is especially true for brick-and-mortar businesses that need to lease or buy office space in a new location.

Lenders are likely to give you the loan if your business is profitable in its current location. Depending on the business’s needs, if you take a long-term loan, the bank may use your business assets as collateral.

Replace or upgrade equipment

If your business requires machinery, you may need to buy or lease it. While leasing is the easier option, sometimes it’s better to buy the machinery.

If you have old equipment that is constantly breaking down or there is new technology on the market, take a business loan and scale your business.

Before you buy the new -one, it’s important to do a cost-benefit analysis and see whether it will generate high returns.

You can sell old equipment and use the proceeds to pay for the new machine.

Purchase inventory

Inventory-based businesses need to have the stock in store to avoid disappointing their customers. If your money is held up and you are running out of stock, consider taking a business loan.

You can also opt to take business if your suppliers are offering stock at a discounted price for a short period. Take a short-term loan if the discounted price will give your business better margins.

Improved cash flow

Your business requires working capital to run day-to-day operations, and it’s important to ensure you maintain a positive cash flow. Small businesses can opt to take a business loan to improve their cash flow and ensure their operations continue.

The business must have proper books of account and a sound business plan to qualify for such a loan.

Take advantage of a business opportunity.

Once in a while, a business opportunity will present itself that is too good to pass up. Consider taking a loan and jumping into it. It’s important to consider the returns you expect before you apply for the loan. Make sure the returns from the opportunity outweigh the cost of the loan.

Factors to consider when taking a business loan

When deciding whether or not you should take a loan for your business, there are critical factors that you should consider. Here are some of the most important:

The amount of money you need

Before you apply for a loan, make sure you have a budget and a plan for how you intend to use the loan. Include the fees you will incur to get the loan as part of the amount you need. To avoid taking out two or more business loans, make sure you include all the costs.

Having a solid plan for how to use the money improves your chances of getting the loan. Different lenders have the maximum amount of money they can lend you. You need to consider a lender who caters to the needs of your business.

How fast do you need the loan?

The less urgent the funding, the better, as you will have time to look at and compare different loans. You will have the time to shop around, check your credit score, and negotiate different packages.

If you need the money fast, you will not have time to shop around for an ideal lender. Prepare in advance if you think you will need a loan in the coming months.

Loan term

The longer the loan term, the more expensive it will be. You don’t want all your earnings going toward the loan repayment. Make sure you keep the loan tenure as short as possible.

However, it’s important to ensure you can pay the monthly installments. The shorter the loan tenure, the higher the monthly repayment.

Alternative business funding

Before you opt for a loan, you need to consider whether it’s the best choice for your business. You need to consider the cost of the loan and whether there are alternative sources of funding that would serve your business better. Here are the pros and cons of a business loan

Advantages

  • Loans are easier to apply for and get
  • You will receive a lump sum amount so you can plan better
  • A wide range of products
  • Improves the credit rating of a business
  • Doesn’t result in shareholding dilution
  • No interference from the bank

Disadvantages of taking a business loan

  • Strict eligibility criteria
  • May not cover ongoing expenses.

It’s important to consider other forms of funding and see which works best for you. Take into account the cost of getting funds and the impact on your business.

 Interest rates

Before you settle for a loan, make sure you compare the different interest rates the lenders are offering. Settle for the lowest interest. Although this is not the only factor you should consider, choose a loan with the lowest interest rate.

Use a loan calculator to determine the best interest rate. Remember that interest is the cost of the loan. Use our business loan calculator to compare the loan option from various lenders.

Consider other fees you will incur.

You need to understand the impact of repaying the loan in advance. If your business flourishes, you may want to pay off the loan early. Take into consideration the early repayment fees the lender will charge.

Other fees you need to consider are origination fees, insurance fees, and processing fees, among others.

Make sure you consider all the fees, as they increase the cost of your loan.

Financial reporting obligations and covenants

Most lenders require that you provide financial statements annually. In addition, they may have other conditions you need to fulfill before they can lend you the money. In the event that the reports and conditions are not met, the bank may demand that you pay back the entire loan.

For example, the bank may require you to maintain a certain cash flow. The lender may require that you take a further loan to maintain the agreed cash flow.

Consider the reporting obligations and covenants for each lender.

Collateral

Lenders may require a guarantee in the event of default. This gives the lender the right to sell your collateral in case you fail to pay the loan. Collateral can include account receivables, inventory, properties, and personal and third-party guarantees.

Take into consideration the kind of asset you would lose if things didn’t work out as planned.

Read the fine print of the loan.

Before you sign on the dotted line, read the loan document. Look closely at the terms of the loan, the payment structure, fees, fees, and other costs you will incur. Make sure you read the loan document and ask the lender about any part that you don’t understand.

Confirm what happens if you default on the loan. As much as you don’t plan on defaulting, business plans can go awry. It’s important to know what happens if you default or delay.

Where to Get a Business Loan

You can get a business loan from a bank, microfinance institutions, or companies. We look at the various business loans in Kenya.

Bank

BankLoansLoan tenureRequirementsInterest rates
Absa BankUnsecured LPO Financing of up to KES 12M Unsecured Invoice Discounting of up to KES 50M Unsecured Bid Bonds of up to KES 6M Unsecured loans of KES 6M with up to 60 months repayment period  Unsecured loans for up to 60 months. Up to 10 years for secured loans.Business should be at least 3 years old.The minimum amount of Ksh 100,000 
National BankLoans up to 3mRepayment of up to 12 monthsMust be in business for at least 2 yearsThe interest rate of 13%  Negotiation fees of 3%
KCB Bank-Small business loansBoresha Biashara loan of up to 1m  
Boba Boda Tuktuk loan – Get 70% financing .  
Jaza duka   Soko /market loan- Get up to Ksh 100,000.     Retailer loans of up to 1M      
Boresha plus -Get up to 5M
Boresha biashara has a tenure of 36 months Repayment of 24 months for boda boda , 12 months for a tuk-tuk. Jaza duka in partnership with master card. Up to 12 months for the Soko loan.    
Repayment of up 60 months
              To get the Soko loan you must be in operation for 6months         Your business must be in operation for 1 year to get the boresha loan                      Interest rates are 0.036 per day,1%  for the undrawn the retailer loans
KCB bank -SME loansTelco agents dealer loan – up to Ksh 100,000 to 10M.               Overdraft of up to 5m    
SME term loans for up to 250M for secured, and 3M for unsecured loans.    
Repayment period of up to 24 months for the telco dealer loan.                   SME term loans for 36 months for unsecured and 60 months for secured loans.Telco dealers can access up to 12 times their commission. Telco dealers must be in business for at least 12 months           SME term loans for 36 months for unsecured and 60 months for secured loans.Telco dealers must be in operation for at least 12 months.          
To get an overdraft you must have 3 years of audited accounts.   Interest rates of CBR 13% +4 and negotiation fees of 3%.
I & M BankOffers revolve around short-term facilities Available in USD, GBP, and EURO 
Equity Bank  Equity account holders who are over 18 years old 
HF GroupLoan amount of Ksh 10,000 to 1M for unsecured loans,50M for secured loansLoan duration of 12 months for unsecured, and 36 months for secured.  

Microfinance institutions Microfinance institutions offer business loans at a monthly interest rate of between 2% to 5%

per month. While microfinance will offer the money quickly, their interest rates per year are quite high, making the loans expensive.

Taking out a business loan can be a great way to get the funding you need to start or grow your business. But before you make the decision to take out a loan, there are a few things you should consider, such as whether you can afford the repayments and whether you have a solid plan for how you will use the loan. Weigh up all the pros and cons before making a decision, and if you do decide to take out a loan, shop around to get the best deal possible.

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