This archive report was first published on 23 June 2021.
Business Loans: A Double-Edged Sword ¶
As a small business owner, navigating the world of business loans can be a daunting task. While loans can provide the necessary funds to cover operational costs, build credit, and take advantage of opportunities, they also come with their fair share of disadvantages.
According to a report by Standard Media, taking out a loan is one of the best ways to solve cash flow issues and ensure the survival of your small business. However, lenders will require you to put some form of security to obtain the loan, and if you fail to pay, you face the possibility of losing valuable business or personal assets.
Before signing on the dotted line, it's essential to carefully consider the following factors:
Is the Loan Necessary? ¶
Loans should only be used for essential business expenses, such as purchasing new inventory, buying necessary equipment, or expanding your business. Consider whether there are other financing options available, such as asking family and friends for soft loans or taking advantage of business credit cards.
How Much Do You Require? ¶
Once you've established that a loan is necessary, the next step is to determine exactly how much money you need. Taking a loan that is too small may lead to misuse of funds, while taking a loan that is too large can have a negative effect on your income-to-debt ratio.
What is Your Credit History? ¶
Your credit history is a major determining factor in your probability of getting a business loan. In Kenya, lenders will look at your personal credit score, so it's essential to have good credit history or score. However, many lenders have specific products for business owners with less-than-stellar credit.
What is Your Collateral? ¶
Longer-term business loans will require you to put down some kind of collateral. This can include log books, title deeds, inventory, cash savings or deposits, equipment, or any other valuable asset. However, be aware that if you default on the loan, you are likely to lose the asset you used as collateral.
