What to Look For When Choosing a Loan
Rather than googling “small business loans near me” and going to the first one that pops up, here’s how to pick the best solution for your needs:
Types of Business Loan
Companies typically offer various options. These are the main ones to consider:
In a term loan, you receive a lump sum of money for your business, which you repay over time in monthly payments that include an interest rate on top of the principal balance.
Business Line of Credit
With a line of credit, you have a maximum credit limit that you can withdraw, generally through a checking account. You only pay interest on what you use, not on the credit limit.
A line of credit is one of the best business loan services when you’re first starting out, and you’re not sure exactly how much money you’ll need.
Small Business Administration (SBA) loans are provided by the government and usually have lower interest rates for business owners. However, the application process tends to be long—up to three months to get approval.
Alternative small business lenders (like SmartBiz) have simplified the process, while SBA isn’t fast money by any stretch of the imagination.
If you need to buy expensive equipment, this type of loan can help you finance the purchase. The item is typically used as collateral in case you can’t pay the loan back.
Real Estate Loan
Commercial Real Estate (CRE) loans act like term loans for purchasing a property. You can use them to finance a business expansion, whether it’s an office, warehouse, or a new retail location.
Invoice Factoring and Financing
If you have pending invoices, you can use them to get a company loan.
With invoice factoring, the lender buys your invoices for a lower rate than the original amount. When the client does pay, the money goes directly to the company.
With invoice financing, on the other hand, you use unpaid invoices as collateral for your loan. You’re still responsible for collecting the money and paying back what you borrowed.
Merchant Cash Advance
Finally, a merchant cash advance is a loan you take out against your future sales. Unlike invoice financing, you use card sales as collateral.
However, these are at higher risk, so they have a higher rate. They might be easy small business loans, but most business owners use them as a last resort because of the high costs associated with them.
How to Assess a Loan
So, how do you know if a business loan is actually a good offer?
Calculate the total payback amount – This is how much money you’ll be giving back, factoring in the principal (the sum you received), interest rate, fees, etc. Knowing the total payback amount helps you assess whether the loan actually fits your budget.
For example, let’s say one of the small business lending companies you’re applying to can grant you $10,000 to be paid back over three years. The loan has a 10% annual interest rate and financing fees of $100. In that case, you’ll be paying back $11,616.19 (just for the loan plus interest). Add the fees, and you get a total payback amount of $11,816.19.
Not sure how to do the math? Use a loan calculator—it’s a free tool that does the work for you.
Consider the term – Long-term loans can fund business expansion and major expenses, but you’ll have to pay them back over the years. Consider if the projected growth is actually worth what you’d have to pay back to the business loan companies.
Make sure you can afford the monthly payments – Add the installments to your monthly expenses and see if your total income is enough to comfortably cover everything. As a rule of thumb, what you earn should be at least 1.25 times what you plan to spend so that you don’t risk ruining your credit score.
Remember: the best small business loans are the ones that fit your needs and help you achieve your goals. But convenience, ease of application, and lender reputation matter too, so research them accordingly.
This article is a great starting point, but it’s also smart to check with the Better Business Bureau for any complaints or even pending lawsuits.
How to Apply for Business Funding
How do you know if you qualify for small business lending?
Your time in business, annual revenue, and credit score are the metrics that matter most. The more well-established and profitable you are, the more likely it is that lenders want to give you money.
Most experts agree that for a low-rate loan, you need a FICO score of over 670-680. But you can get a loan with a much lower score than that.
Research the institution beforehand to see what most borrowers look like—alternative lenders and bad-credit small business loans can help you get financing, even if you don’t qualify with a bank.
Once you’ve picked your lender, these are some of the documents you might need for your application:
- Tax returns (personal and business)
- Balance sheet
- Income statement
- Bank statements (personal and business)
- Documents about your business (articles of incorporation, etc.)
- Business licenses
- Commercial leases
- Identification documents
- Business experience and financial projections
Finding the best small business loan can be a long and frustrating journey.
For some business owners, getting a bank loan is simply not an option. Poor credit scores and previous financial trouble can make you an undesirable candidate for traditional institutions—but this is where alternative lenders come in.
These companies might be pricier, but they offer life-saving loans if you’re out of money.
Ultimately, we can’t tell you where to get a small business loan. The best solution depends on your financial situation, but you can trust our ranking to provide reputable options that will help your business grow and thrive.