A Quick Guide To Choosing The Right Small Business Loan

Loan application form with pen on paper / financial loan negotiation for lender and borrower on business document mortgage loan approval

Starting a business or expanding one needs funds. Regardless of where you are in your business’s life cycle, a small business loan can help you turn an idea into a profitable business or provide extra liquidity along the way. 

Getting a small business loan may sound easy–until you find yourself overwhelmed by the numerous choices available. Don’t worry! This article offers a step-by-step process to find the right business loan for your needs. 

1. Understand The Why

There’s no shortage of firms that offer online small business loans. Before choosing one, the first thing you need to do is to determine why you need a loan. What will you use the money on, and how will it help your business grow? Answering the ‘why’ can help narrow down the type of loan you need. 

For instance, an SBA loan is your first option if you need funds to establish your business. A line of credit may be a good choice if you need funds to improve cash flow. In addition, some use cases such as purchasing inventory or marketing campaigns will apply to numerous types of loans.

Take note that most reasons for getting a small business loan are better than the others. For instance, if you’re getting a loan to boost profit or grow your business, then that’s a good reason to get a loan. However, if you’re using a loan to prevent your business from going bankrupt, then you need to think twice about borrowing. The last thing you want is to get a debt you can’t pay off. 


2. How Much Do You Need?

You can find loan offerings from a few hundred dollars to millions. Thus, you need to consider how much you’ll need. Unfortunately, getting the wrong size loan is one of the most common mistakes that most business owners make. 

Borrowing as much money as you can get is not the answer. Since you’re just borrowing, you’ll need to repay it soon, along with the associated cost and fees. So, getting a bigger loan than what you need means bigger payments and fees, which can be problematic for your cash flow. Don’t borrow the money you don’t need and end up paying an excessive amount. 

That said, you don’t want to borrow a too-small loan. You don’t want to come up short on cash in the middle of replenishing your business supply or renovating your retail store. 

So, find the right balance–one that’s big enough to cover whatever it is you need to spend on but small enough to make payments manageable. 


3. Determine Your Options

Traditionally, business owners take out loans from banks and other financial institutions. Today, however, you can find numerous alternative lenders providing all sorts of financing options to help with varying funding reasons. 

Here are some examples:

  • Bank Loans: Traditional bank loans are the first go-to option for most small businesses. However, the numerous requirements and slow processing often cause entrepreneurs to look somewhere else. 
  • SBA Loans: If you can’t get approved for traditional bank loans, you may find alternative options with SBA loan programs, including micro loans, 504 loans, 7(a) loans, and more. 
  • Working Capital Loan: This type of loan helps fund daily business expenses. It’s mostly offered by online lenders and provides easy applications.
  • Merchant Cash Advance: A merchant cash advance may be a good option if your company accepts card payments. This type of funding allows you to receive a lump sum in exchange for a specific percentage of your credit card sales in the future. 
  • Business Lines Of Credit: With this type of loan, you can borrow a set amount, but you only need to repay the amount you use or take out. 
  • Business Credit Cards: Most businesses turn to commercial credit cards to pay for purchases. Take note that you need to make monthly payments on time, or it can damage your credit score. 

Take note that other types of loans help fund specific needs, for instance, equipment financing, invoice factoring, and commercial real estate loans. 


4. Compare Offerings

Once you decide on the type of loan you want, it’s time to look for available lenders and compare their offerings. 

In particular, consider these three things when comparing your options:

  • Interest Rate

The interest rate is the loan amount charged by the lender, generally expressed as the percentage of the principal. 

  • Repayment Terms

Repayment terms are the time you have to pay off the loan. It may seem like a small detail in the fine print of your contract, but it can make a difference between saving and spending more on your loan. 

  • Application Fees

Did you know that some lenders charge a fee when you’re applying for a loan? So, make sure to ask if there are any costs associated with your loan application. Some lenders will charge the application fee. Others charge fees for things directly tied into the application for instant appraising collaterals or running your business’ credit report.


Take Away

Small business loans are not a one-size-fits-all solution. They vary so much both in features and purpose, so you must do your research before applying. Make sure to use the steps above to guide you throughout your research and in choosing the right loan for your business needs and goals.