Whether you want to increase your inventory, purchase supplies, expand into a new territory, or hire more staff, small business loans can provide you with the cash you need. However, the multitude of options and funding sources can be confusing for business owners, so how do you find the right solution?
Before you close the deal on a loan, consider the different loan types so you know which will work best for you.
Several types of small business loans exist, including bank loans, SBA-backed loans, lines of credit, angel investors, and loans from friends and family.
Bank loans offer a structured solution, often with low interest rates and flexible repayment terms. The Small Business Administration provides guarantees for many bank loans, which increases your chances of getting approval if you lack a foundation of good personal and business credit.
A loan from someone you know might seem like a tempting option, but it also carries risks. You don't want to destroy a personal relationship over money, so if you take this route, put everything in writing and communicate often so you know where you stand.
Similarly, angel investors can seem like a business's saving grace, but you have to compromise to get funding. The investor will want an equity stake in your business and might request other perks as a result of his or her association with your company.
The best small business loan for your enterprise provides you with the capital you need and favorable repayment terms.
Loan Duration Some small business loans fund short-term needs, such as the payment of an unexpected debt, while others take care of long-term expenses, such as real estate acquisitions and revolving merchandise accrual.
Short-term loans typically last for 6-12 months. Since you repay the balance quickly, you typically pay less interest, which means it's the least expensive choice. However, it also depends on the amount you need to borrow.
A long-term loan might last 10 years or more. This type of loan typically goes toward long-term investments that will continue to benefit the company at least until the loan is paid off. If you decide to expand into another city, for example, a long-term loan to acquire a new building makes sense.
Loan Interest Checking with different financial institutions to learn their rates pays off for small business loans. The amount of money you need remains fixed, but the interest rate is a variable in the equation. According to Forbes, small loans tend to cost more in interest than big loans. This is largely because the lender will make more money on a long-term, high-dollar loan, so they can afford to lower their rates.
Generally speaking, conventional bank loans and business lines of credit offer better interest rates than the other options. If you can qualify, this is the loan type to pursue.
Loan Requirements Every financial institution and lender can choose its own loan requirements and repayment terms. Learning about those criteria can help you make a more informed decision.
For example, some banks only lend money to businesses that have been in operation for a specific period of time. Others require borrowers to have a certain credit score or to offer property as collateral. You'll want to find out whether or not the loan includes a balloon payment at the end.
Taking out a small business loan can infuse your business with the cash it needs to prosper. If you need a loan solution for your business, contact us to learn about our offerings.