MENU
A good idea plays a vital role in becoming a successful entrepreneur and small business owner, but it’s not the only requirement. Unless you have the means to self-fund your business, securing a business loan is one of the first steps you’ll take. However, this process can be confusing and stressful. How do you choose the best business loan for your needs and objectives? We’ll explain the process of choosing a loan that suits your unique entrepreneurial needs.
Editor’s note: Looking for a financing solution for your business? If you’re looking for information to help you choose the one that’s right for you, use the questionnaire below to get information from a variety of lenders for free:
Take the following steps to help ensure you pursue and apply for the most suitable loan for your situation.
Before pursuing lenders or taking steps toward funding, get a clear picture of how lenders see you by knowing your credit score and debt-to-equity ratio.
Before choosing a business loan, write a business plan and outline your objectives so you and potential lenders can get a handle on the best funding options for your situation.
Assess your funding needs before applying for a loan. If you borrow too little, you won’t cover your startup costs and may incur additional fees to increase your loan amount. If you borrow too much, you’ll pay interest on a higher-than-necessary principal.
First, consider why you’re borrowing money. You may be taking out a loan to pay for startup expenses or cover other financial needs, such as the following:
After determining how much money you need, it’s time to research lenders. Talk to colleagues and industry peers, and visit review sites for recommendations and advice.
When researching lenders, assess the following critical factors:
Be open to working with both larger, well-known lenders and smaller lenders as long as they meet your requirements; for example, if you need to get a business loan with bad credit.
While the interest rate shouldn’t be a deciding factor, you must consider it. For example, if a $100,000 loan has repayment terms of five years, a difference of two percentage points may not matter much. However, if the loan were for $1 million spread out over 20 years, those percentage points would be significant.
It’s also important to look at the annual percentage rate (APR). This tells you the total cost of the loan, including interest and fees.
As noted above, business loan repayment terms are a crucial consideration. Determine how much time you have to pay off the loan. Terms can run from as short as three months to as long as 10 years. What does the payment schedule look like? Can you pay off the loan early, or do you have to wait until maturation? While these details may seem insignificant, they can save or cost you tens of thousands of dollars.
Next, assess how much you can afford in loan payments. Calculate monthly payment amounts for various loans and see how these payments fit into your overall budget. The longer the repayment terms, the smaller your payments will be, but the more interest you’ll pay. Conversely, the shorter the loan, the less interest you’ll pay. You must be able to afford your loan payments without dipping into savings or impacting cash flow.
Some lenders require you to offer personal or business collateral to back up the loan if you default. Others require a personal guarantee.
Some lenders impose application fees, while others don’t. Ask any potential lender if fees are associated with the application. Additionally, determine if the lender charges fees for items tied to the application process, such as the cost of running your credit report or getting your collateral appraised.
For each lender you’re considering, evaluate all factors, including costs (interest rate, upfront fees, penalty fees), terms (length of the loan, ability to repay early, lump sum versus line of credit), and collateral or personal guarantee requirements. Calculate the loan’s projected cost over the repayment term to more accurately compare loan options.
Next, eliminate the most expensive options and compare terms for the remaining lenders.
It’s OK to take things slowly. Rushing into a loan is ill-advised. Prematurely selecting a loan, only to realize later that you chose the wrong one, can devastate your business. Be patient and carefully evaluate all your options as you navigate the process.
After thoroughly assessing potential lenders and loan options, it’s time to apply for a business loan with your top choice. If its terms are acceptable, complete the process. Otherwise, apply to your second choice.
Various types of business loans exist. Two of the most common categories are Small Business Administration (SBA) loans and traditional loans.
There are several SBA loan options, including the following:
Many lenders that specialize in SBA loans will walk you through the process, including Truist. Learn more in our review of Truist.
SBA loans are great – if you qualify. However, traditional loans offer even more opportunities for borrowers who don’t meet the requirements or need something more flexible. Traditional loans include the following:
Alternative lenders are more willing than banks to work with business borrowers with credit challenges. You may pay more interest to alternative lenders, but if the advantages outweigh the costs, it may be worth it.
Loan type | Pros | Cons |
---|---|---|
SBA loan |
|
|
SBA 504 loan |
|
|
SBA disaster loan |
|
|
Lenders issue funds with varying speeds. If you need a fast business loan, check out our Rapid Finance review. This lender can approve you and deposit your funds in as little as one day.
We’ve evaluated many of the best business loans and financing options to help small businesses choose the best lending option for their situation. The following lenders stand out as excellent options:
BusinessLoans.com is a one-stop shop that can save businesses time as they shop for loans. Instead of applying with individual lenders, you can fill out a single application on this platform, and it will match your needs to multiple lenders in its network. BusinessLoans.com can help you identify lenders you might not otherwise have considered. Our review of BusinessLoans.com details its easy application process and favorable terms.
Fundbox can help you with traditional term loans and short-term lines of credit. Lines of credit can help you limit your accrued interest because you borrow funds only when you need them. Its navigable interface helps you stay on top of your loan while maximizing cash flow. Our Fundbox review explains how the platform will integrate with the best accounting software solutions to reduce manual data entry.
Noble Funding goes above and beyond to make the lending process easier for its clients. Offering various loan products, including term loans up to $500,000 and short-term bridge loans up to $2 million, the company works with you to create an initial cost estimate so you can tell right away if it’s a viable option. Our Noble Funding review explains that this lender has no prepayment penalties and doesn’t require collateral.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.