How to Choose the Best Business Loan – Types of Loans & Application Procedures

Despite many success stories from entrepreneurs who went from broke to rich, many new business owners still require some help to build their startups. Hard work and ambition are essential, but unfortunately, they are not enough to provide the cash flow your business requires.

This is when you understand the necessity of a business loan. These are some of the most popular types of financing available for businesses. But then, there are quite a few things you need to consider before hunting for the best small business PPP alternative on the market.

How much do you need?

It is essential to figure out upfront how much money you need – fortunately, many lenders and brokers provide loan calculators, so you can figure out precisely how much money your business requires. Generally speaking, there are four reasons wherefore you might need money.

First, you may need money for your business expansion. Second, you may require money for your operating expenses. Third, you may need it for loan refinancing. Finally, if the business is new, you will need money for all these things to get it running.

When trying to figure out how much money your business needs, you need to look a bit further. The initial investment is not everything you need. Think about maintenance costs as well – they will add up within the first month.

Then, how about some commercial insurance? You will usually be able to pay it monthly. The same goes to utilities, which will start hitting you after the first month. It is easy to focus on what you need upfront, but there is much more to think about.

Do you have a business plan?

It is nearly impossible to find a lender who can offer you money without actually considering your business plan. A solid plan is your map to success. You need it not just to get a loan, but also to show potential lenders that you know what you are doing. They need to see how you plan to repay the loan.

Without a plan, most lenders will simply ignore you. The good news is that over the past few years, some online lenders have expanded their operations, so they now provide loans without any formal plans – however, fees and requirements might be a bit higher.

Then, there are lenders that do not even require an application process. Unless your business is brand new and has no income, they will pre-approve you based on your sales. This kind of financing works well for established businesses but not for new ones.

It is worth noting that lenders without too many requirements will usually provide short-term loans with high-interest rates. At the end of the day, it is up to you to determine what kind of lender your business needs.

Have you thought about repayment?

Furthermore, you have to figure out a way to repay the loan. You must be realistic regarding what you can pay on a monthly basis. Think about potential issues as well – unexpected situations like supply chain issues, social changes (such as the recent pandemic), or seasonal problems.

Generally speaking, lenders will consider your repayment capabilities according to the type of loan you get, your overall profits, the type of business and how much you have been on the market, your personal income, and, of course, your credit history.

The credit history shows whether or not you are a responsible person. If your credit is good, you are more likely to get good interest rates. On the other hand, bad credit will add to the monthly repayments – that, if you are lucky enough to get the loan in the first place.

Most lenders know that each business has different requirements, so there are more options out there. Most types of loans come with specific repayment periods, so you need to know precisely how long it will take to repay the loan. Here are some of the most common options:

  • Microloans – usually up to 6 years
  • Business lines of credit – usually up to 5 years
  • Equipment financing – usually up to 10 years
  • Term loans – usually up to 10 years, more common for well-established businesses
  • SBA loans – usually up to 10 years, more common for small businesses with unique needs
  • Invoice financing – usually up to a few months, more common for businesses with long invoicing times

Get in touch with an independent financial advisor

While every lender or bank will have financial advisors to help you out, an independent one is more likely to be objective. Plus, they usually search through different systems and lenders in order to find the best deal for your business.

A lender’s financial advisor is not bad if you have already decided on an institution. However, if you are not sure where to go for the best deal, an independent advisor will provide a deeply personalized deal based on your unique needs.

A financial advisor will also help you decide on the type of loan you need. With so many options out there, it is not unusual for less experienced business people to make poor decisions, since there is no one they can rely on for advice.

All in all, once everything is set and ready, it is time for your application. Different lenders have different procedures for their applications – some of them may not even require an actual application. Go through all the steps, and you should have your money in no time.

Conclusion

A business loan is a major financial decision. It may look easy and straightforward, but it is not. As 2020 has clearly proved, unexpected situations may arise when least expected. Economic disruptions are more common than ever these days.

Such things will have a significant effect on everything related to your business. As a business owner or manager, you are the one who should know better than anyone else if a loan is right for the business. Before making such decisions, make sure you have a good plan in mind.

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