How to choose the best type of business loan for your company
In the current economy, business loans are what is keeping small and medium businesses on afloat. According to some recent reports, more than half of businesses seek additional funding to expand their operations, purchase business assets, or pursue new development opportunities. Many entrepreneurs will also go to banks and lending companies to obtain operational funds. Getting a business loan for your company is something you may need to consider at some time. But how do you choose the best type of loan for you?
Types of Business Loans Available to Businesses
Whether you want to launch a company, grow an already established one, or keep your business afloat, a business loan could come in handy. You may have heard about soft money loans vs. hard money loans, but the lending landscape is much more varied than just this. Each type of loan comes with its own benefits and risks.
As a business seeking outside funding, you should do your homework on the different types of loans available to you. According to this lending company, working capital loans are the most popular and easy-to-access. With terms ranging from a few months to a few years, working capital solutions address a myriad of problems: cash flow gaps, urgent need to pay bills, expansion, investments, and more. The available thresholds also vary, while interest rates can work in your benefit, as long as you choose both your loan type and your lender correctly.
Before we continue, keep in mind that a 2019 survey conducted by the Federal Reserve banks showed that seven out of ten small businesses carried outstanding debt. Therefore, it is crucial to understand how to choose the right loan for your business, so you do not get into financial trouble in the long term.
How to Choose the Right Business Loan for Your SME
The first step in choosing the right loan is to understand how your company performs in the eyes of a lending company or bank. Businesses with creditworthiness, market experience, and good credit scores can opt for working capital loans such as term loans, microloans, business lines of credit, business credit cards, merchant cash advances, or an SBA loan.
If you are new in the business landscape, need emergency funding, or do not have an impressive credit score, you can opt for a short-term loan, merchant cash advance, or invoice financing.
1. Purpose of the Loan
Narrowing down the purpose of your loan helps you understand what type of loan you need, what lending institution you should contact, and what eligibility criteria you have to meet.
- If you want a loan to ease your cash flow, a business line of credit might be for you.
- For long-term investments spanning a good couple of years, you might want to consider an SBA loan.
- If you want to buy a new building, however, a commercial real estate loan is your go-to option.
Before you jump the bandwagon of business loans, ask yourself this: do you need a loan to expand, improve, and develop, or do you need a loan to survive? Instead of seeking funds to make ends meet (and thus burden your company even more), it is maybe wiser to reevaluate your business plan.
2. Understand How Much Money You Need
You may be able to get a loan ranging from a thousand dollars to a couple of million dollars. Decide why you need the money and what amount your business really needs. “As much money as they can give me” is not a good loan strategy, as you will have to pay it back – with interest.
A lending company or bank will help you calculate the size of your loan. However, keep these things in mind:
- Consider a loan large enough to cover your projects in their entirety, but small enough to be manageable;
- When you calculate the amount, add the upfront fees the bank or lending company will ask for processing your application, plus taxes, and other expenses;
- Make sure you have the down payment at the ready for more complex types of loans.
3. Recheck Honestly Your Creditworthiness
When it comes to business loan requirements, you need to take an honest look at yourself and decide which route to take. Check with the lender beforehand, verify your financial statements, and see how your credit score is doing. While the eligibility criteria may vary across lenders and types of loans, you need to present a solid business plan before you apply for a loan.
4. Check the Lender’s Credentials, Fees, and Processes
If you want invoice financing or a short-term loan, it is probably not a good idea to go to a bank. On the other hand, for an SBA loan, you need to look for an accredited lender. Equipment loans are some of the best options for startups and established businesses to get the machinery they want at affordable interest rates without damaging their working capital with massive purchases.
However, if you have a poor credit score or you want a quick fix for a financial problem, you need to look thoroughly, as banks and other prominent lenders do not offer these types of loans.
The idea here is to match your needs with the loan’s minimum and maximum thresholds, terms, interest rates, fees, and APRs.
5. Apply for the Loan and Wait
Now that you’ve prioritized your needs and have chosen the right loan offered by the right institution, it is time to prep your application. The required documents vary across lenders. Keep in mind that some loans have speedier delivery than others do too. Get ready to wait for a good couple of months for an SBA loan, a couple of weeks for a business line of credit, and just a few days for a merchant cash advance.
Getting a loan is a lot more challenging than you think. However, if you do not have other options, make sure you understand how business loans work and what lenders are the right ones to help you achieve your goals.