How To Choose The Right Small Business Loan?
Recently, more and more small business owners are looking for small loans to expand their business, purchase necessary equipment and cover other expenses. However, now there are a huge number of different loans, so people are wondering how to choose the most suitable loan offer for a small business. Depending on your needs and credit history, you can get a loan both from a bank and from alternative lenders, who also provide several types of different loans.
After studying this guide in detail, you can choose the option that is right for you and your business. Even if you have no idea how to choose a loan - here you will find everything you need.
Why Do People Apply for Business Loans?
For many years, business loans have been a fairly popular type of financing. Of course, every business owner has their own reasons for applying for funding. Someone needs money to increase cash flow, someone wants to expand their business, someone needs new equipment. Moreover, business loans can also be used to consolidate debt. However, what are the benefits of a business loan?
- Fast money. As a business owner, you know that attracting new investors can take quite a long time, up to one year. That is why it is much easier to apply and get a loan from a bank, a credit union or an online lender. Thus, you will be able to receive financing as soon as possible and cover all necessary expenses.
- There is no need to share business with anyone. When working with investors who provide you with the capital you need, they want to be involved in how the business is run. However, if you take money from a bank or an alternative lender on your own, then the business remains completely yours and you can manage it yourself.
- Low interest rates. Of course, the interest rates you receive will differ depending on the lender or your credit history. However, it is important to note that they will still be less than if you were applying for a credit card.
Read more: Direct lender Installment Loans
What to Look for Before Getting a Small Business Loan?
Before considering the types of loans and deciding which one is best for your business, you need to assess the situation you are currently in. First of all, you need to know what the current state of your business is. After that, decide how much money you need for your business and what exactly it is for. The next question you need to ask yourself is how long it will take you to repay the debt. If you do not know your credit score, then you should also look into this issue. You can request a free copy of your credit report once every 12 months from one of the three major credit bureaus.
In addition to these questions, also consider whether you have other outstanding loans and whether you can afford to take on another one. Also consider whether you need a long-term or short-term loan, and whether you can provide collateral to secure the loan.
What Types of Lenders Can I Consider?
Small Business Administration Loans (SBA loans)
At the moment, there are several loan programs that are designed to cover various business-related needs. It is important to note that with these loans, the government does not give money directly. The SBA sets certain rules for risk mitigation. Thus, each SBA loan type will have its own parameters regarding how the loan can be used. The advantage of this loan is that the terms are most often favorable to the borrower. However, approval may take some time, and the borrower may face additional fees and more stringent requirements.
Conventional bank loans
Such loans from banks are famous for the fact that they have low interest rates and the approval process is usually faster. However, the repayment periods of this loan may be shorter than those of SBA loans. It is also worth noting that getting approval can be difficult due to the large number of eligibility criteria.
Such lenders are very popular among those small business owners who have bad credit history or no bad credit history. The eligibility criteria are generally minimal and the application can be submitted entirely online. It is also important to note that there are both direct alternative lenders (eg SBG Funding) and credit markets (Bizfi). However, it is important to pay attention to the fact that such payday direct lenders most often have high interest rates due to high risks.
Business Loan Types
Each of the above lenders offers several types of loans. Below you can explore more detailed information about them in order to find the most suitable offer for you.
- Micro loan program. This loan is designed for a new or growing small business. The money can be used to buy furniture, supplies, inventory, equipment, and cannot be used for debt consolidation. The loan amount most often reaches $50,000. The maximum repayment period is 6 years.
- SBA7(a) Loan Program. This is the SBA's primary lending program, which can be used to cover almost any business expense, such as working capital, the purchase of building, renovations, business expansion, and so on. The maximum amount is $5 million and the maturity can be 10 (for working capital) or 25 (for fixed assets) years.
- Real estate and equipment loans. Borrowers can also obtain long-term, fixed-rate financing for fixed assets (equipment and real estate). Most often, the SBA provides about 40% of the total project cost, the lender covers 50%, and the borrower pays the remaining 10%. The money can be used to buy land, a building, renovate existing ones, buy equipment, or refinance debt due to business expansion. However, money cannot be used for working capital or inventory. The maximum loan amount is $5.5 million, and repayment terms can be either 10 or 20 years.
- Disaster loans. If a building, equipment, etc. has been damaged in a natural disaster, then this loan will be the right option for you as it is suitable for all types of businesses. Loan amounts can reach $2 million.
Bank loans and alternative loans
More often than not, banks and alternative lenders offer similar loan options that are not offered by the SBA. This may include:
- Equipment loans. Banks and alternative lenders offer their own types of equipment loans. Thus, instead of making the entire payment at once, the borrower will pay off the debt in regular monthly installments. This loan is easier to obtain than other types of loans, since most often the purchased equipment is collateral for a loan.
- Working capital loans. These loans are a short-term solution for those types of businesses that need money to finance operations. Such loans are provided by both banks and alternative lenders. This loan is popular because small businesses can continue to operate while looking for other ways to increase income. However, these loans often have short maturities and high interest rates.
- Lines of credit. At the moment, credit lines also provide small businesses with money to cover their daily cash flow needs. Payment terms can vary from 90 days to several years. The advantage of this option is that you will only pay interest on the amount you use. These loans are most often unsecured and do not require collateral, but they are not suitable for large purchases. Also, if you make payments on time, you can improve your credit score. However, you should be aware that you may also be subject to additional fees.
- Franchise startup loans. If you are an entrepreneur and you need funding to open your own franchise, then this loan might be a good option. It can be used for working capital to build stores, restaurants, buy equipment and so on.
- Invoice factoring loans. This loan was created so that the borrower could receive money for outstanding invoices. This option is well suited for those enterprises that although receive funding for invoices that have not yet been paid.