If you own a small business, choosing the right loan can sometimes be a critical decision to stay in business or grow into a larger, long-lasting company. However, finding the right way to fund your business can be a challenging and daunting task. You need to accurately estimate how much money do you really need and avoid accepting the first offer that comes your way. If you need to face an emergency bill, a short-term business loan could be the best solution to solve the issue as quickly as possible. On the other hand, if you need to invest money in promotions or to grow your startup, a long-term loan could be better to avoid facing unnecessarily high-interest rates.
The first step to decide which loan is the right business loan for your business is to ask yourself a few questions to better pinpoint your needs.
- What do you need the money for?
- What’s the exact amount of money you need?
- How quickly do you need the money?
- Do you plan to pay it back within months or years?
- What credit score do you have?
- How solid is your business?
- How much cash flow do you have on a monthly basis?
- Do you have any collateral to put up for the loan?
- Is your company facing a crisis?
Now it’s time to get a quick overview of the various small business loans available.
Short-term business loan
Short-term loans are a fast and simple solution to borrow a set amount of money upfront, which can be then paid back over a very short period of time. Usually, a short-term loan is paid back within 3-18 months on a daily or weekly rather than monthly basis. They don’t need much paperwork, and even businesses with bad credit status are eligible to obtain them, often within the same day. The negative aspect of a short-term loan is that the interest rates can be very high (usually around 15-20%), especially if your credit status is all but perfect. If you have a strong cash flow and want to quickly get out of a bad spot (such as if you need to fix a broken machine), a short-term loan might be the best solution.
Not much different from a short-term loan, with a traditional-term business loan the lender provides you with a lump sum of money, which you will then pay back over a set period. The main difference with a short-term loan is that instead of paying it back within a few months, you may have much more time to do so and with significantly lower interests (usually around 7-10%). For obvious reasons, a traditional-term loan seems to be a better choice in almost every aspect: lower fees, more time, fewer risks. However, to qualify for this type of loan you need to produce enough documentation to show the lender that you’ve been in business for a while, have a good credit score, and are able to generate steady revenues.
Small Business Administration (SBA) loans
Small Business Administration (SBA) loans are long-term funding plans guaranteed by the government for business owners who have been turned down by banks. SBA loans can be requested for anything, from purchasing new equipment, refinancing other debts or even acquiring real estate. They come with the longest payment terms and some of the lowest interest rates, however, securing an SBA loan is no easy feat. You need to prove that you’re a reliable borrower by providing a lot of paperwork, wait for a lot of time and often provide collaterals to the lender.
Business line of credit
With a business line of credit, a bank or other financial institution gives you a capital to address your monetary needs. Similarly to what happens with a credit card, you have a credit limit you can use for anything you may need at a given time and then pay interests only on the amount you actually use. Even those with bad credit can use business lines of credit loans, but at higher rates. Business owners may use this type of loan to increase their flexibility when handling seasonal cash reductions and replenish stocks. The main downside, however, is the constant need to provide an updated documentation upon each draw, which may cause the paperwork to add up quickly.
Choosing the right loan for your business is a critical step to ensure your company keeps growing and thriving. After deciding which type you’re most comfortable with regarding payments and rates, keep looking for the various offer available on the market. There’s a world of difference between each or bank or institution, so don’t stop looking until you found the perfect loan to fit your needs.