Even the most brilliant of business ideas cannot survive without sufficient capital. Whether you are planning to start a new business, or need to inject some capital to cut back your losses, it is important to secure your financing needs. This will help create a backup in order to cater to all unexpected expenses and other hurdles.
Once your financing needs are secure, you can focus on achieving your dreams and fulfilling your business objectives. In this article, we will walk you through the factors to be considered when borrowing an emergency loan.
But first, let’s look at the circumstances that require that we borrow emergency loans.
What Warrants an Emergency Loan?
The realm of corporate business can be challenging, and require identifying financing opportunities and securing capital investments. Emergency loans tend to leave little time for consideration, leaving entrepreneurs in a tight spot. This can often be caused by a lack of strategic plan and pragmatic decision-making. Borrowing involves debt, which increases liabilities, and ultimately adds to your financial worries.
Before you opt for borrowing loans, it is important to identify the best financing options for your business. There are many emergency business loans that come at affordable rates and do not burden entrepreneurs with soaring interest rates.
Following are the 4 factors to consider in order to find a way out of the uncertain situation:
Mapping out Short & Long-term Goals
What do you intend to achieve with your business loan? Emergency loans tend to get approved and funded within a 24-hour period. They come with higher interest rates and a shorter repayment period than most conventional loans. This requires strategic planning and goal-setting.
You need to devise your short and long-term goals to establish the profitability of your business and your repayment plan. Once you have obtained the loan, set out your goals to cover up your losses and generate sufficient profits in order to implement a recovery plan simultaneously. Focusing on profitability is crucial to ensure you can flexibly pay off your loan without leaning towards further losses.
Mapping your short and long term goals will also help you understand how much borrowing you actually need. Do you want to finance a new line of products, or perhaps cover your losses following a damaged shipment? Or perhaps, you need to invest in new equipment after a massive breakdown at a project site.
Borrowing Requirements & Eligibility
Before you apply for an emergency loan, be sure to examine the requirements and eligibility criteria. Lenders typically require a comprehensive financial check to verify the background and reliability of the borrower. Lenders will also require financial documents of your business to examine its profitability and risk gearing abilities. Your credit score ranking and debt-to-income ratio will make a significant impact. Your fixed and variable expenses, overall business plan and other documents will also be required.
Shopping for Interest Rates & Loan Terms
Emergency loans are always taken out to avoid catastrophes and cut back on losses. But this is not a time to throw caution to the wind and take up the first financing option. You need to take out time to shop around for loan terms and interest rates. It is important to adopt a loan plan that is most suited to your financial health and profitability of your business.
Many entrepreneurs find themselves in a bind over pressing financial concerns. Pragmatic decision making is of the utmost importance here. You need to shop around for interest rates, specialty loans and get competitive quotes from various lenders. This will help you examine the cost of borrowing and adopt a flexible repayment plan. It is highly advisable to compare various options before you make a final decision.
Keep in mind that borrowing will have a significant impact on the credit score ranking of your business. It is crucial to avoid engulfing yourself and your business into debt. Entrepreneurs who are considering equity financing need to reconsider their options. Are you willing to surrender partial control and ownership of your business?
You need to consider all your options before you agree to give up partial control over your business. Having multiple stakeholders and owners will deprive you of total control, which may bring unwanted effects. In such situations, emergency business loans with short-term repayment plans are a much better option.
4. Repayment Plans & Terms
Emergency loans tend to come with short repayment plans, typically 18 months or less. Since they are a fast funding option, you get a quick approval at the cost of higher Annual Percentage Rates (APRs). They tend to cost more than conventional loans and needs that you plan ahead for your repayment. Business loans tend to be simple with fixed interest rates.
You need to focus on setting milestones based on your affordability to make the process less complicated or overwhelming. Be sure to calculate your total interest repayment, and devise a flexible schedule. You can work with your lender to carve out a flexible plan as per your financial health and profitability.
It is important to note that your business structure, revenues and expenses will have a significant impact on your repayment. If you have a partnership structure in your business, you and your partner can share the cost of the loan. However, as a solo business owner, your goal should be to cover your expenses without further increasing your liabilities.
Emergency loans are a pragmatic strategy of covering up unexpected costs without the burden of long-term interest repayment. There are many options available to steer your business out of a tough time and lead it towards profitability.
Before we conclude this article, let’s look at the two major options to pull your business out of the financial quagmire. Typically, there are two kinds of options available: debt financing and equity financing. Debt financing involves borrowing and repaying along-with interest. Conversely, equity financing involves the sale of a stake or the ownership of your business. This could involve partially losing your business and profits.
Last Few Words
Emergency loans tend to be difficult as they involve fast access to funding to cover up unexpected expenses and losses. Often times, startups and small businesses need short-term loans with shorter repayment periods. Each business has its own needs and requirements for emergency loans. However, carving out an exit strategy is crucial at all times. This helps you forecast your future expenses and profits, develop a pragmatic repayment plan and steer your business towards financial wellbeing.