June 29, 2022

How to Select the Best Small Business Loan for Your Needs

Business loan funds can cover anything from grand expansion plans and product development to renovations and hiring.  Of course, even the best small business loans cost money, and unlike a grant, you’ll need to repay the loan funds you take out.  Not every business owner is prepared for the application process, eligibility requirements, and responsibility of repaying a loan. In addition, what makes a small business loan “the best” depends on your unique business needs. Business loans aren’t one size fits all, so it’s imperative that you conduct research before applying for a small business loan.  Therefore, to select the right business loan program, we recommend evaluating various external factors, including the type of loan, and internal factors, like your reason for pursuing a loan. All of these factors should be considered so that you can be confident that you’re taking out a loan that will benefit your small business.  To help you with that evaluation, we’ll explain what you need to consider when selecting the best small business loan option. 

Why Do You Need Small Business Financing?  

If you’re looking for the best loan for your small business, you’re looking for growth opportunities. That’s all well and good, but you need to get ultra-specific about why you need business financing. The more specific you get, the easier it will be to research and find the ideal business financing fit.  Getting specific means determining what you plan to use the financing for, when you need it, and how much money you’ll need. Lenders will appreciate it if you have a clear idea of how you plan to use funds and when you ideally need them.   New call-to-action In the sections below, we’ll explain why these factors must be considered before starting the business loan application process. 
  • How Will You Use the Business Loan Funds? Most business owners have an idea of how they could use funding when they decide to pursue loans. However, you should consider how receiving a loan will affect your business’s finances once you receive it. 
  • How Will the Loan Affect Your Business Finances? Will you be able to responsibly pay off the business loan on time, or are you concerned about juggling loan payments with existing responsibilities? Do you need the funds for an expense, such as inventory, that could provide a quick return on investment? Answering these questions will help you make the best decision for your business. 
  • How Quickly Do You Need a Small Business Loan? Suppose you have an immediate funding need, such as equipment repairs or payroll. In that case, you can determine if business lenders can provide you with funds during your desired timeline. While some alternative lenders can deliver funds within 24 hours of approval, traditional bank loans can take much longer to receive. 
  • Could You Delay Applying for Additional Financing? It’s also important to consider why you might not pursue business financing at this time. Even if you want to take out a small business loan, evaluating decisions from multiple perspectives often generates unexpected, helpful insight. 
For example, perhaps you’re paying off an existing loan or recently opened your business. In these scenarios, delaying applying for a loan may be prudent.  If you are paying off debt, you may receive a better business loan offer once you’ve paid off your remaining balance. Or, if you own a startup business, it could be easier to qualify once your business is established. Many lenders have time in business requirements, making it challenging for new business owners to secure funding.  Once you determine why you require business financing, you’ll need to narrow down your viable business loan options. Due to this, the next step is to identify the funding types you should consider.  

How to Determine the Best Loan Types for Your Business Needs  

It wasn’t long ago that taking out a loan from a traditional bank was a business owner’s primary option for obtaining additional financing.  However, alternative lenders offer various innovative financing options such as merchant cash advances, invoice financing, credit cards, and equipment loans—a few common examples.  All this to say, if you’re looking for the best loans for small businesses, consider the following alternative financing options: 

1. Equipment Financing

If you need financing to purchase or rent equipment, you should consider applying for equipment financing. It can only be used to fund equipment purchases and can’t be used for any other business costs. 

2. Invoice Factoring

If your business has unpaid invoices, you can work with an invoice factoring company to get the necessary funds. They’ll also be responsible for contacting your customers about submitting their payments. 

3. Business Lines of Credit

If you apply for a business credit line, you’ll be able to borrow up to a set amount. In addition, you’ll only need to repay the amount you take out. 

4. Merchant Cash Advances

If your business accepts credit card payments, you may qualify for a merchant cash advance. You’ll receive lump-sum financing in exchange for a percentage of your future credit card sales. However, suppose you don’t receive frequent credit card sales. In that case, remitting your advance will be challenging, so you most likely won’t qualify. 

5. Working Capital Loan

A working capital loan will likely benefit you if you need financing for everyday business expenses. Working capital loans come with set amounts and terms and usually are relatively easy to pursue. 

6. Franchise Startup Loan

For startup owners, franchise financing can be a viable funding option. Many business loan providers work with new franchise owners to help them get their locations up and running. 

7. Business Credit Cards

Many business owners turn to credit cards to afford necessary purchases. Although having a credit card can be beneficial, it’s crucial that you make your monthly payments on time. If you fail to pay off your balance, your personal credit score could take a hit. 

8. SBA Loans

If you can’t get approved for traditional funding options, you may qualify for an SBA loan program. The SBA offers numerous loan programs, including the 7(a) loan, 504 loan, microloans, and disaster loans. 

How to Determine Your Business’s Ideal Loan Amount  

One of the most important things to do when looking for a business loan is to match your resource needs with your financing. In other words, the business loan amount you take out should be large enough to cover the expenses you expect to incur.  Suppose the business loan amount you receive is too small. In that case, you won’t have enough money to invest in your business or afford necessary costs, such as payroll or equipment repairs. However, if the loan amount is too large, you’ll be forced to pay a high-interest rate for money you don’t need. Plus, you’ll be stuck with a larger repayment amount that you may not be prepared to manage.  Due to this, it’s essential to put together a detailed budget with projections, even if your small business loan provider doesn’t require it. These projections should include the following information: 
  • Seasonality changes 
  • How funding will affect your business finances 
  • Other funding responsibilities 
Your financial projections may not be perfect, and it’s possible that your situation could change. However, your forecasts will certainly help you identify the amount of business funding you need at this time. 

Review Repayment Terms, Restrictions, and Fees  

Once you’ve determined why you need business funding and your ideal loan type and amount, it’s time to get into the details of your potential loan options. That means looking at each of the business loan options you’re considering and reviewing their terms, restrictions, and fees.  You may have to contact your prospective business lender to compile this information. However, in most cases, you’ll be able to get many of these details from a lender’s website.  Pay special attention to how the loan’s repayment terms, restrictions, and fees are structured. How your loan is structured can significantly impact how, when, and in what amount you must repay it.  While some business owners can handle long-term loan payments, others may prefer a short-term loan. Ultimately, you’ll need to evaluate the following: 
  • Your business’s financial goals 
  • Cash flow patterns 
  • Annual revenues 
  • Existing debt 
  • Credit history 
Also, you may only incur certain fees, such as a prepayment penalty, in specific circumstances. Therefore, it’s essential to understand how different scenarios may affect the amount or timing of your payments. 

How to Vet Your Business Loan Lender Options  

The best small business loan offers come from the best lenders. So, once you’ve familiarized yourself with the structure, purpose, and loan terms, it’s time to research online lender options. Here are some of our top suggestions for researching business lenders and weighing your funding options: 
  • Read Online Reviews: A good first step is looking for your potential lenders’ online reviews. To find reviews from other businesses, search for “[your lender’s name] + reviews” and look for authoritative sites such as Lending Tree. 
  • Check Out Their Website: Often, business lenders feature customer testimonials, eligibility requirements, and other helpful information about their funding process. Reviewing their online presence will help you determine if they’re a reliable funding source. 
  • Contact Potential Lenders: Another way to vet your small business lender is to pay close attention to customer service. After all, even if you take out many loans, your lender will be more of an expert than you. Your lender should be able to help guide you through the application process, anticipate your needs, and answer your questions. If they aren’t helpful from the beginning, chances are they won’t be attentive once your business loan is funded. 

Conclusion: Take Your Time to Select the Best Business Loan Option  

As a small business owner, your priority is to find a loan product that maximizes profit and minimizes risk for your company. That means considering all angles, including: 
  • Business loan amount 
  • Business loan term 
  • Type of small business loan 
  • Loan application process (speed and difficulty to qualify) 
  • Interest rate, costs, and fees 
  • How the business loan will benefit your business 
  • Customer reviews and testimonials 
To ensure you select the right funding option, we suggest taking your time and don’t rush the application process if the loan option isn’t right for you. By evaluating your funding options, you can select the right loan program to have ample cash flow for your business.  Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2022.