Most short-term lenders offer borrowers another loan after their business loan is repaid about 50%. It can be enticing to get your hands on more cash. But how do you know whether you should take it or not?
If you’ve been working with a lender for some time and had a history of trustworthy repayments, it’s not surprising that you’ll receive another offer of more capital in form of a small business loan. Remember, lenders make money when they offer you another loan, so it might never be in your best interest to accept another loan offer from the lenders. However, before you accept the offer, ask yourself these six critical questions.
- Do you actually need it?
Unless you’ll have an explicit plan of how to use the money, don’t hurry in getting your hands on more cash. Before you accept it, make sure to understand what will be the expected return on investment and whether the cost is worth that ROI. If you need some extra cash for your business, it’s better to secure a business line of credit, where you’ll only pay when you actually draw on the credit line. You can also get business credit cards to help build your business credit.
- Has earlier financing influenced your business growth?
Successful repayment of a loan helps in improving business credit scores. This not only assists in your fundability, but also aid in improving your odds of getting a loan at better rates and terms in the future. You should also evaluate how financing had impacted your business when you first borrowed it with bad credit. Making timely loan payments and infill will help improve your chances of securing desirable financing opportunities in the future.
- Does this another loan offer suits your needs?
Before accepting cash for your future endeavors, weigh your needs first. You probably can use cash to fulfill your long-term purposes, like buying new equipment or commercial real estate, but a quick short-term infusion of cash isn’t a suitable decision to finance long-term plans. Keep in mind that you should compare your needs with the loan terms.
- Are new loan terms desirable or affordable?
After paying your first loan up to 50%, you can expect desirable or at least affordable interest rates and terms the next time you apply for financing. But, what if the lender is reluctant to provide flexibility in the terms of the outstanding portion of your loan? Whether the additional loan can be used to repay the original loan without any prepayment penalties?
- Does the loan make financial sense for your business?
While reviewing alternative lender’s short-term loans, comparing loan costs and terms can be sometimes perplexing. With different repayment terms, fees, and non-standard interest rates encumber to evaluate what you’re actually paying and how cash flow is influenced by the repayments. However, putting every loan intro APR can display differences between their interest rates and fees, but it’s not always in the cards. You can use various loan calculators to do the math, but if you are still unsure, get help from an accountant to inspect whether the loan makes financial sense for your small business or not.
- Are other lenders offering better loan deals?
Even if everything is up to your satisfaction, your current loan terms might not be the best ones you can get. New financing opportunities become available in terms of lower interest rates, larger amounts, and better terms as your business credit score start building. Before signing for any loan, make sure you’ve done thorough research and compare different lenders’ terms and rates to determine what other lenders have to offer before signing on the dotted line.
The Bottom Line
Eventually, keep in mind that the lender didn’t offer you another loan just to be nice! Lenders are in the business of making money from loans, and when you borrow more, they make money more. So before accepting another loan offer, do the job to evaluate whether it makes sense for you or not.