Small Business Loan

How to Choose the Right Small Business Loan?

Securing your business funds is a necessary step in getting yours off the ground and helping it grow. The key is to know what type of small business loan best suits your needs and both your long- and short-term goals.

Before choosing just any small business loan, there are a few steps to take:

Decide Why You Need the Loan

Before borrowing funds, consider why you need the loan. You may have a specific reason, such as to purchase a new piece of equipment, or you might need funding to keep your business running.

It would help to write down any needs to stay organized and break down your action plan.

Do you need funds to be available to you at various times of the year?

Do you expect to need to borrow funds from time to time?

If so, pursue a small business line of credit instead of a traditional business loan. This will allow you to borrow from it, pay those funds back, and then borrow again as you need to. It can work as a type of emergency backup source of funds.

It may also work well to borrow every time you need to make a big purchase, and you don’t want to deplete your cash reserves while doing so.

How Much Do You Need?

Before approaching a lender to see if you qualify for a small business loan, consider how much you need. Smaller, short-term loans may be available to some businesses right away. Larger loans and lines of credit may require a bit more time.

Bigger loans also call for more credit approval and can sometimes depend on your access to collateral. No matter what size loan you choose to receive, it’s essential to get enough funds to meet each of your needs, so you don’t have to go through the credit approval process numerous times.

Document what you need and why. Your lender may request some details about how you plan to use the funds. When you can show them how it will directly impact your business’s profits or growth, that may encourage them to lend to you.

Determine How Creditworthy You Are

Lenders need to be sure your creditworthiness is documented. For larger businesses or well-established ones, the company’s credit health is an essential component of this process. The lender will look at your financial records, including expenses and revenue, to determine how much they can lend.

For most smaller businesses, a company’s owner might use their credit to qualify. If you plan to do this, be sure to know if your assets are at risk should you default.

What can you do to show your lender that you’re a good fit for a loan? Here are a few things to keep in mind:

  • Document your income and revenue across the board. Make sure they can tell you have a reasonable payment coming in.
  • Utilize some of your assets as collateral. If you own the building, your company operates in high-valued equipment, which may reduce some of the lender’s risks.
  • Use personal credit to show you’re financially responsible. Lenders want to know the person handling the money will make wise decisions and on-time payments.
  • Express the value of the loan to you. This is not just the amount you’ll get, but how it will directly impact the way you do business. Will it help you to grow your company? Will it shore up losses and costly credit accounts?
  • If you have multiple loans, consider asking a lender to consolidate them. This makes them more affordable and may save you money depending on your interest rate.

Having a conversation with your lender about your needs is essential. That’s one of the top reasons to seek out a local financial institution that can help you.

Compare Loan Options to Determine What’s Best for Your Business

Just qualifying for a small business loan isn’t enough. You also need to have terms that fit your needs. It may hurt your company to take on too much debt or too high of an interest rate. That’s why comparing loan offers is so critical before accepting any offer.

Loan Terms

The loan term is the length of time you have to repay the funds. The longer the term is, the lower your monthly payment will be.

However, the longer you extend those terms, the more time there is for interest to build on that loan, making it more expensive.

Long-term loans tend to be ideal for big purchases such as real estate. The sooner you can pay off these loans with business loans, the sooner you can create more cash flow for your company. Finding the right balance here is critical.

Long term loans are often best for:

  • Buying real estate for your company
  • Acquiring another company
  • Renovating a large area
  • Expanding your business
  • Consolidating other loans

Short-term loans can be beneficial in situations where you need:

  • Fast cash
  • Cash flow support.
  • Equipment financing
  • Payroll support or other emergency needs
  • Smaller consolidation loans for high-interest rate debt

If you have good credit, your chances of securing a small business loan for a short amount of time is likely.

These loans typically process faster, which means you can get money in hand right away. The key is you don’t have a lot of time to repay them. Make sure you can confidently cover those costs for the whole term.

Interest Rate

Many factors play a role in what you will pay in terms of an interest rate on your small business loan. Your credit is one of the most significant factors.

You will also find that interest rates depend on how much risk the lender takes on. For example, a secured loan usually creates a lower interest rate because there’s less risk overall.

Interest rates are critical. You never want to pay too much to borrow funds. This can be a problem for some types of financing offers for emergency needs.

For example, some lenders may charge you a much higher interest rate on a short term loan if you need emergency funding to keep your business open. That is one reason why it is vital to work with a lender that understands your needs and can offer affordable opportunities for you.

Specific Loan Types

There is a range of specific small business loans out there to consider using. These can work in some situations, but specialized loans may be more expensive than a general business loan if you have good credit.

Equipment Loans

If you are a startup or do not have a lot of credit history, equipment loans are beneficial. They allow you to finance your equipment, which is an excellent advantage if you are beginning. These loans are secured by the equipment, which may mean if the loan defaults, you will lose that equipment. Interest rates on equipment loans range but tend to be more affordable because they are secured.

Invoice Financing

If you need to improve cash flow quickly, you might wish to use invoice financing. The loan is structured around your unpaid invoices. It helps to give you funds now and then lets you repay them with interest or fees as your invoices are paid. You may be able to secure as much as 85 percent of the unpaid invoices you have this way.

Working Capital Loans

Working Capital Loans provide an upfront payment to you. As your receipts come in and sales are made, you can repay the loan with each payment. Sometimes this can be based on the credit card transactions you have.

Small Business Administration Loans

Your lender can help you qualify for Small Business Administration (SBA) loans that the federal government backs.

The government does not lend those funds to you, but it does provide lenders with a bit more peace of mind. If you default on the loan, the SBA will help cover some of the lender’s losses. The direct result of this is less risk to the lenders, which translates into lower interest rates for you.

There are various types of SBA loans available. Your lender can help you determine which, if any, you qualify for and the application process for each.

It’s essential to look at all of the picks to assess if these loans are the right choice for you based on how much you can borrow, interest rates, and terms. Borrowers have to meet more stringent qualifications to obtain these types of loans, but it can be worthwhile for many borrowers.

Not sure about the best lending product for you?

Reach out to your local bank to learn more about the lending options available.

Your financial institution can offer insight and direction for you, helping you ensure you’re receiving the best loan to help your business grow and flourish in the short- and long-term.

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