If your small business is in need of a loan, then you might be inclined to accept the first offer that comes your way.
But not every small business loan is right for you. In fact, you might be throttling your cash flow or leaving thousands of dollars on the table if you're not thinking carefully about what sort of loan your business needs. Or, even worse, you might find that you're unable to solve the problem that you needed a loan for in the first place.
Avoid this trap by carefully considering what exactly you need from that business loan. There are plenty of different factors to take into account, but you can start by asking yourself these 5 questions to figure out what your business requires from a lender.
1. How much money do you need?
You're looking for a business loan because you need money that you don't have right now--so you should have an idea of how much cash you're looking for. It's important to be flexible and realistic with the range you ask for, since a lender will see it as a reflection of how well you understand your business's financials and growth potential.
Naturally, a loan offer that's too small to help you isn't worth taking... Unless you could use that money to solve your problem in a different way, or to tackle some other expense on your plate.
However, a loan offer that's too big could also be an issue. The bigger the loan, the bigger your payments--and if you don't have a way to turn that extra capital into additional revenue down the road, then you'll just be paying more interest than you want or need.
When you're comparing loan offers, you'll want to settle on the one that's just the right amount. Be responsible with what amounts you ask to borrow, and think carefully about how you could spend what you're offered.
2. How much does it cost?
When comparing loan options, most people look at interest rates to determine which loan costs more.
While it is important to understand how much that capital will cost, you don't only want to analyze your potential loan's interest rate. You should ask the lender for the loan's annual percentage rate, or APR, as well. This figure takes additional fees, like origination and loan processing charges, into account, giving you a more accurate estimate of the loan's total cost.
Plus, don't forget to ask whether your loan has a prepayment penalty or other additional costs. The more you know about the costs of your options, the better you can figure out whether your business can afford the loans you're considering.
3. What's the term?
You can pay some loans back over the course of 6 months--while others could take 10 years.
Do you know which one you prefer?
A multi-year loan might sound daunting: that's a long time to be making repayments, after all. But generally speaking, longer-term loans come with larger amounts and lower interest rates, and are usually only offered to business owners with proven track records.
Different term lengths also generally come with different repayment schedules. The shorter your loan term, the more often you'll make smaller payments, and the opposite for longer terms.
4. How soon do you need cash?
When it comes to business financing, generally speaking, fast cash is expensive cash.
In other words, the quicker you want that capital, the higher its price will be. Without the luxury of underwriting at a leisurely pace, lenders will hike up their rates in order to cover for potential losses.
If you need a business loan ASAP to cover for an emergency or take advantage of a fleeting deal, then you can generally expect to pay more for that convenience. On the other hand, if you're willing to wait weeks or even months to secure financing, then you could be looking at a substantially more affordable loan.
If you need that cash now, then you need it now--but remember that you might be able to save money if you're willing and able to be more patient with the loan application process.
5. Why do you need a loan?
Finally, there are all sorts of different kinds of loans. It's important to make sure that yours will help you the most.
First of all, do you need a term loan or revolving credit? If you're looking for help with making recurring expenses, or you want a cash cushion in case of a rainy day emergency, then a line of credit or business credit card could be just what you need.
If you need money for a one-time purchase, though, a term loan probably makes more sense. But if you're planning on buying equipment or inventory, you might be able to finance them instead. Alternatively, if you need a loan to cover for late-paying customers, then consider financing your invoices.
There are plenty of different options, so explore what's out there in order to find the best financing option for your small business.
The Secret Behind Picking the Right Loan
Everyone's circumstances are different--so before you settle on a loan for your small business, make sure you fully understand the particulars of your situation. A lot of money with a low interest rate might sound great, but if you won't be able to qualify--or if you need that capital right away--then it's not the right loan for you.
Once you answer these questions and have a solid handle on your business's financial needs, finding the best business loan is just a matter of matching up your requirements with your options as best as you can. Good luck!