Here’s What to Look for in a Small Business Loan

You need money to start a business, or maybe you need to inject some cash into your business during a seasonally slow period. You need a small business loan. But not just any loan will do.

There are so many loan products available to small business owners. You have to consider what you’re going to use the money for, and how you’re going to repay it. You also have to choose a loan with an interest rate you can afford and repayment terms you can live with. You shouldn’t borrow more than you need, and you should be prepared to go through an SBA loan qualification process no matter what kind of lender you choose.

Interest Rates

The interest you’ll pay on a small business loan can depend somewhat on what type of loan product and the lender you choose. Interest rates on small business loans from banks can range from 4.9 to 9.83 percent. Small Business Administration (SBA) loans range from 10 to 12.5 percent interest. 

However, other business loan products can have much higher interest rates. You can expect 10 to 99 percent interest on business lines of credit, 10 to 79 percent for invoice factoring loans, and 40 to 350 percent for merchant cash advance loans. High-interest rates don’t necessarily mean a loan product isn’t right for you but make sure you know what the interest rate is and that you have a workable repayment plan.

Repayment Terms

You absolutely need to make sure that you can handle the payments on your small business loan. It’s a good idea to only borrow 10 to 30 percent of your annual revenue so you can comfortably repay it. Keep your payments as low as possible, so you don’t have cash flow problems. 

Loan terms can range from a few months to 30 years, depending on what kind of loan you get. SBA disaster loans have the longest repayment schedule. Merchant cash advances, invoice factoring loans, and business lines of credit tend to have the shortest repayment schedules. Bank loans and most SBA loans have shorter repayment terms of six to 10 years.

Loan Amount

It’s tempting to try and borrow as much as you can, but you shouldn’t borrow more than you need. The more you borrow, the more you’ll have to pay back. If your business has frequent cash flow issues or you’re not sure how much you’ll need, you should go with a business line of credit that lets you borrow exactly as much as you need, pay it back, and borrow from it again. If you need less than $50,000, you could go with an SBA microloan. Decide how much money you need before you speak to lenders, and have a plan for it – lenders will want to know exactly how you plan to use the money to improve your business anyway.

Qualification Process

It can be really hard to qualify for small business loans, and much easier to qualify for others. For example, to qualify for the SBA disaster loan of up to $2 million, you have to have been affected by a natural disaster. Each SBA loan has its own requirements, and they can be stringent. Bank loans can be almost as difficult to qualify for. You’re going to need to produce a lot of paperwork, but a lender or other intermediary can help you with the process. 

It can take months for a traditional bank or SBA loan to process, but if you need money fast, alternative online lenders can typically offer a streamlined qualification process and funding within a matter of days. These kinds of loans can be good for when you need to make payroll during a tight month, for example, but may not be the best option for a planned expansion or equipment upgrade. Even though the qualification process is faster, you’ll still need to provide a lot of information and documentation.

Collateral Requirements

Many lenders will require you to put up collateral for a small business loan. You put equipment, inventory, or real estate up for collateral. Some lenders may also require you to make a personal guarantee, which means you may have to put up personal property, such as your home, to guarantee the loan. You should shop around for a lender with collateral requirements you can live with.

It’s not always easy to choose the right small business loan. It’s important to consider how much you need, how fast you need it, and how much you can afford to pay back before you make your decision. The right loan product will help you run your business better.

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