5 Factors To Consider Before Taking Out A Commercial Loan

When you’ve got that goal to start a business, there’s one hard decision that you as an entrepreneur, big or small, would face: taking out a commercial loan. This is difficult because, yes, you’re going to need that ample amount to start a business. 

But remember this is a credit that comes with an underlying interest rate. It could haunt you for many years to come in the future. Thus, it adds pressure on you to make your business perform even better financially so you can finish paying off your business debt faster.

Factors to Consider Before Taking a Loan

While taking out a loan can be quite scary, it doesn’t always have to feel that way. It starts with a good and sound research process on sources like Commercialloans.Com.Au and similar websites to ensure you get a good grip of what the commercial loan entails.

That said, here are important factors you could consider before signing that final document on your commercial loan.

1. The Funding You Require

The first thing you could consider is the amount you’ll need to start your business. This is important as you’ll have to get this estimate accurately. It shouldn’t be too little such that it won’t be enough to start a business or too excessive that you’re paying for interests on an amount you’re not even able to use for your business.

Try to sit down and calculate every single expense you’re going to need and then leave room for a little bit of extra, in case your estimate is too little. Remember to include all the fees in your quotation.

2. Your Credit Scores And History

One of the factors that can help credit institutions determine whether or not you’re safe for them to lend credit to is your credit score and history. If you got any other outstanding loans, it’s important to have these settled early on. 

That way, it won’t hurt your credit score. Otherwise, banks and other institutions may not be so generous about their offer. Remember they also have to protect themselves from borrowers who have a bad history of not paying their debts on time.

Most importantly, when your credit score and history is good, you could also be entitled to better terms. This could save you more money in the long run.

3. Your Business Income

Before starting a business, it’s wise to have a business plan. This includes a feasibility study, which typically projects your income potential of five to ten years. You may use the results of this feasibility study also to have sound insights on the possible income of your business. This information is needed so you can determine your ability to pay and how much you can afford to pay monthly.

As much as possible, your monthly payment amount for your loan shouldn’t be anywhere close to 50% of your monthly income. Or else, you might not be giving yourself enough room for other expenses like contingencies and employee salaries and benefits. Remember that the first few years after opening a business would probably be risky. The last thing you’d want to happen is to continue paying for a loan for a business that has negative earnings or flopped.

4. The Urgency Of The Amount Needed

There’s also a need to factor in the urgency of the amount you’d use. Do you need it now, or do you have around six months to a year before the starting of your business will go in full swing?

The general rule that may be taken note of is this: the lesser the urgency is, the better your options are going to be. If you have a little bit more time before signing the loan agreement, this means you’ve also got more time to improve your credit score and pay off any outstanding loan. 

In effect, it’s believed that your rates are going to be better, and perhaps you could even enjoy a lower interest rate. This could be more beneficial for your business in the long run.

If you need the money the soonest time possible, it’s important to be ready to pay a higher interest rate, given the higher risk that credit institutions face when they give borrowers automatic trust.

5. The Fine Print

Before signing a loan agreement, it’s crucial to first go through the fine print. Try to assess what you’re setting yourself up for. It’s not advised to rush through the process. If there’s anything unfamiliar to you, it’s best not to shy away from inquiring about it. Better yet, it would help to have a financial adviser explaining every single detail to you.

Factors to Consider Before Taking a Loan


Now that you’ve got this list, it’s perhaps safe to assume that you’re one step more prepared in your pursuit of taking out a loan. Remember this isn’t a decision you could make overnight. It's one you might have to thoroughly think through to ensure no page is left unturned. This is a major decision, so it’s better not to leave any room for error. Taking out a commercial loan doesn’t have to be a heavy burden as long as you’re well informed and equipped with everything you need to know about your loan.

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