5 Things to Consider Before Accepting An Emergency Business Loan
When an emergency strikes, a sense of panic can quickly set in. With the clock ticking down, you don’t always have the time to make the best decisions; you need money fast. It might be tempting to shake the first hand offering you money, but before you jump into a situation that could quickly escalate into a new emergency, you should take a moment to consider your options and circumstances.
Here are five things to consider before taking out an emergency loan:
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1. Is This A Genuine Emergency Or Time-Limited Opportunity?
The first question to ask yourself is whether your circumstances truly warrant going into debt. Can those repairs be kicked down the road, or will they put you, your employees, or your customers at risk? How soon will the productivity gains from that new piece of equipment offset the total costs of buying it now? What will you lose by not acting now?
Of course, sometimes the choice is totally clear. You might need a bridge loan to cover expenses during a particularly challenging time of year, for example. Or you might need to replenish your inventory during a local emergency.
2. Do I Understand the Costs?
The next step after determining that a loan is necessary is making sure you understand how the loan works. Unfortunately, the short-term loan industry is, in many ways, designed to make that a difficult task.
The details offered by short-term loan providers–if details are offered at all–may not be easy to compare to those of other funders. How do you go about comparing a factor rate to an interest rate to a flat fee? What service and/or origin fees does the funder charge in addition to the amount you owe?
Luckily, if you’re willing to do a little digging and a little math, there are ways to make a direct comparison between short-term financial products.
3. Do I Have Collateral?
Nowadays this isn’t a make-or-break question, but it’s still one that can determine the types of short-term financial products that are available to you. Banks and other funders tend to be risk averse, so having a valuable asset you can use as collateral will often have a positive effect on the rates and maximum amounts you’re able to borrow.
Be wary of blanket liens and documents that can waive your right to dispute debts in court, though. These can leave your business at the mercy of your lender if something goes wrong.
4. Is My Cash Flow Steady?
If you don’t have collateral, you aren’t out of options. You can still qualify for unsecured loans. Many short-term lenders (and merchant cash advance providers) will look at your average monthly revenue. If you can produce 3-6 months of bank account statements showing a reliable revenue stream, there’s a good chance you can qualify for an emergency loan.
Funders get around the collateral issue by using automated clearing house (ACH) debits to withdraw payments on a daily or weekly basis. Just be forewarned, this schedule can be pretty punishing if you’re not prepared for it.
5. Have I Actually Found A Good Deal?
Landing a good offer will be the most time-intensive activity in the emergency loan process. Don’t assume that the first offer presented to you is the best you can do. Be sure to read both user and professional reviews of prospective lenders. Are customers generally satisfied? Does the lender have an A+ rating with the BBB? Will the deal you’re initially presented with be the one you actually sign?
Take nothing for granted and do your due diligence. When it comes time to start making payments, you’ll be glad you did.