Choosing the Right Business Loan: A Beginner’s Guide

Are you considering taking out a business loan?

You’re not alone. At any given time, about 50 percent of small businesses have financing needs, which are more often than not met by securing loans from lenders.

Whether you need the loan to launch a new business idea or expand an existing enterprise, one thing is clear: it’s an ideal way to finance your business. However, with several types of business loans on offer, it can be difficult to find the right facility for your needs.

That’s the whole point of this article. We’re telling you how to choose a loan that’s right for your business.

Read on!

Understand Why You Need a Loan

The first step to finding the right loan for your business is to understand why you need the money in the first place. This is because business loans are typically designed around a specific purpose.

It’s not uncommon to find business owners who’re looking for a loan but don’t know what they’ll use the money for. This is a recipe for disaster. First, you’re unlikely to get approved for a business loan when you don’t have a specific reason. Second, even if you get the loan, you’re likely to misuse it.

The reason for getting a business loan should also be valid. For example, it’ll be hard to get a business loan when what you want to do is go on vacation.

A solid reason to get a business loan is to secure startup capital or working capital if you have an existing business. Another reason is to purchase manufacturing or production equipment. Others include buying commercial real estate and financing order purchases.

Know the Different Types of Business Loans on Offer

Having a good understanding of the different types of business loans you can find in the lending market is key to choosing the right loan. After all, how can you choose something that you didn’t know exists?

Here’s a breakdown of the most common business loans.

Startup Loans

The name explains it all. They’re designed for entrepreneurs who need capital to start a business. You can use the money for a wide range of startup activities, including hiring business formation lawyers, product research and development, and leasing a commercial space.

Working Capital Loans

Once a business is up and running, it needs money to keep funding day-to-day operations. This money is called working capital.

When a business’s working capital is running out, getting a working capital loan is an ideal way to inject some cash into the business.

Equipment Financing

If your business is equipment-intensive – perhaps you run a manufacturing business – an equipment loan will come in handy. This is a secured loan with the collateral being the financed equipment.

Business Lines of Credit

A business line of credit is like the credit card you’re used to. A lender approves your business for a specified credit limit amount, which you can then use for business expenses.

SBA Loans

The federal government through the Small Business Administration partners with various banks across the country to offer business loans.

There are different types of SBA loans, depending on the purpose. They include:

  • Economic injury disaster loans
  • 7(a) loans
  • 504 loans
  • Microloans.

SBA loans carry a distinct advantage over private-sector loans. They have better terms and conditions. However, it’s super difficult to get approved for an SBA loan because the requirements are stringent.

Consider Loan Terms

Generally, longer-term loans have lower interest rates but turn out to be more expensive. Shorter-term loans have higher rates but you’ll pay less money in interest. Be sure to check out more about the various types of term loans you can find.

When you’re planning to take out a business loan, it’s important to think about loan terms and establish whether your business is better off with a short-term loan or a long-term loan.

To decide, look at your business’ cash flows. If your revenue is low, for example, you want a loan that offers the lowest monthly installments. In most cases, this will be a long-term loan.

But if your revenues are high and your business has enough margin to afford to pay higher monthly installments, then you might want to go for a short-term loan.

Evaluate Your Business’ Credit History

Applying for a business loan is a lot like applying for a personal loan. The same way a lender will want to check your credit history is the same way a business lender will want to check the business’s credit history.

Therefore, it’s essential to know how your business’s credit history looks like before applying for a loan. If the business has a poor history or low credit score, it will be harder to secure a loan in the formal lending market. In this case, you’ll try to find lenders that focus on helping businesses with bad credit.

Consult with a Lender

Most lenders have loan officers who will advise you on the right business loan to go for. You just need to ask. So, if you’re unable to make a decision on your own, don’t hesitate to consult with your lender.

Get the Right Business Loan

Business loans have their pros and cons but for the most part, they’re an ideal source of business funds. There are different types of business loans, but with this guide you now have the information you need to choose the best loan for your needs.

All the best and keep reading our blog for more small business tips and advice.

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