Guide To Choosing The Right Small Business Loan
It’s only a few businesses that can boast of the ability to survive without external sources of funds. Coupled with a looming recession and a volatile market, it’s more than normal to begin to consider alternative sources of funds or debt to supplement your business activities.
One such way is looking for a small business loan. This is a popular choice amongst business owners who have a good track record of revenue and good credit, since they are able to get the most competitive rate from lenders.
To be able to land on the right business loan operator, consider this valuable guide;
1. Choose The Right Type Of Small Business Loan
The first step towards choosing the right business loan is to understand your goal. Why do you need the loan? Is it to pay off your employees, or you’re on the verge of missing out payments to your key supplier?
There are short and long term loans that suit any individual situation. It might be for the financing of a business expansion or large purchase. Then you can look into traditional term loans which offer individuals lump sums to pay back over time with interest.
If you only need funds to take care of your everyday expenses, Then there are much more flexible loans that do exactly that, like paying salary or maintenance
2. Check Your Eligibility Status
Finding a competitive deal on a business loan doesn’t just depend on finding a lender that offers low rates and the right type of financing. No matter where you apply, your business is more likely to qualify for competitive terms if you and your business meet the lenders’ requirements.
These consist of criteria such as how long your business has been operating, whether you have a strong personal credit score, the collateral you are willing to lay down and how much you have personally invested in the business among others. These are important questions you need to work out before applying, and when done right it’ll increase your chances in obtaining a good rate.
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3. Determine How Much You can Afford As Monthly Payments
The best small business loans will provide you with bi-weekly, monthly, or even custom payment options, but typically lenders require monthly payments. Factors to consider during this stage are your cash flow statement, which typically helps you determine how much of your cash can go into the loan repayment without it crippling your business and a critical assessment of the loan terms, which helps you to gauge yourself from any future surprises. Consider the fact that your total income needs to be at least 1.25 times your total expenses which includes your new monthly repayment amount.
For instance; if your business income is $100,000 per month all things being equal, then 1.25 times of your income is $80,000. This amount should total all of expenses combined including the loan repayment. So your monthly repayment amount will be a fraction of $80,000
4. Determine What Collateral You Have For The Loan
There are options for both secured and unsecured loans. Secured loans need collateral in order to close out. Collaterals are financial assets you own, like a building, property, or a car which can be used to pay the lender in case you are not able to pay back the loan.
You could be required to provide a personal guarantee by some lenders. With a personal guarantee, you may utilize personal assets like your home or family car as security, which can be used for the repayment of the business loan whenever you miss out on your payments on time.
5. Weigh Up Offers from Different Lenders
It’s crucial to compare small business financing choices while seeking for reasonable interest rates or choosing between SBA loans, equipment finance, or another sort of business financing. This will offer you key insights such as;
- How long it takes to get the loan (30 – 90 days),
- Different amount offered by lenders (10,000 – 500,000),
- The loan terms (5 – 25 years).
Through banks, the U.S. Small Business Administration guarantees general small-business loans with its 7(a) loan program, microloans, disaster loans and 504 loan program. Though this requires you to be in business for two years or more with a consistent revenue. Microlenders also offer short-term loans of less than $50,000. Major requirement consist of detailed business plan, financial statements and a description of the use of the loan
6. Apply For The Business Loan
Once you know the type of loan that ultimately suits your needs and profile, as well as the lenders that offer the exact plans, it’s time to send in a loan application. It’s wise to pay close attention to the different APR stated by each lender and choose the one with the lowest. You don’t want to end up paying more than you want to for the sake of high interest rates
In Conclusion:
There is no one best way to choose the right small business loan. The process is unique from one person to another. Knowing the type of loan you need and whether you are comfortable with the terms and associated requirements can set you and your business on the right track.