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How to Select the Best Small Business Loan for Your Needs
February 11, 2022
14. How to Select the Best Small Business Loan-05

How to Select the Best Small Business Loan for Your Needs

Small business loans are an incredible resource for entrepreneurs who are looking to grow their operations, afford emergency expenses, or simply have access to additional cash flow.

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 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 prior to applying for a loan.

Therefore, to select the right business loan program, we recommend evaluating a variety of external factors, including the type of loan, and internal factors, like your reason for pursuing a loan.  All of these factors should be considered in order to 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.

Why Do You Need Small Business Financing? 

If you’re looking for the best loan for your small business, that means 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 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 if you have a clear idea of how you plan to use funds and when you ideally need it. In the sections below, we’ll further explain why these factors are necessary to consider prior to starting the business loan application process.

  • How Will the Business Loan Be Spent? Most business owners have an idea of how they could use funding by the time 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 Loan? If you have an immediate funding need, you can determine if lenders can provide you with funds during your desired timeline. While some alternative lenders can provide funds within 24 hours of approval, traditional bank loans can take much longer to receive.
  • Could You Delay Applying for Financing? It’s also important to consider the reason why you might not pursue financing at this time. Even if you’re certain you’ll take out a small business loan, evaluating decisions from multiple perspectives often generates unexpected, useful insight.

For example, perhaps you’re in the process of paying off an existing loan, or you recently opened your business. In these scenarios, it may be prudent to delay applying for a loan. If you are paying off debt, you may receive a better loan offer once you’ve paid off your balance. Or, if you own a startup business, it could be easier to qualify once your business is established.

Once you determine why you need financing, you’ll need to narrow down your business loan options. So, the next step is to explicitly identify the types of financing you’re going to consider.

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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 main option for obtaining additional financing.

However, alternative lenders offer all kinds of innovative financing options such as merchant cash advances, invoice financing, and equipment loans—to name a few.

All this to say, if you’re looking for the best loans for small businesses, consider the following alternative financing options:

  • 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.
  • Invoice Factoring: If your business has unpaid invoices, you can work with an invoice factoring company to get necessary funds. They’ll also take on the responsibility of contacting your customers about submitting their payments.
  • Business Lines of Credit: If you apply for a business credit line, you’ll be able to borrow up to a set amount but will only need to repay the amount that you take out.
  • 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, if you don’t receive frequent credit card sales, it’ll be too challenging to responsibly remit your advance, so you most likely won’t qualify.
  • Working Capital Loan: If you need financing for everyday business expenses, a working capital loan will likely benefit you. Working capital loans come with set amounts and terms, and usually are fairly easy to apply for.
  • Franchise Startup Loan: For startup owners, franchise financing can be a viable funding option. There are many business loan providers who work with new franchise owners to help them get their locations up and running.
  • 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.
  • 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 you’re looking for a business loan is to match your resource needs with your financing. In other words, the business loan amount that you take out should be large enough to cover the expenses you expect to incur.

If the loan amount you receive is too small, you won’t have enough money to invest in your business or afford necessary costs. However, if the loan amount is too large, you’ll be forced to pay a high interest rate for money that you don’t need.

Therefore, it’s so important to put together a detailed budget with projections, even if your business loan provider doesn’t require it. These projections should include seasonality changes, how funding will affect your business finances, and any other factors.

Your projections may not be perfect, but they’ll certainly help you get closer to the amount of funding you need.

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.

To compile all of this information, you may have to contact your prospective business lender. 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 are structured as well as their restrictions and fees. How your loan is structured can have a significant impact on 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 important to understand how different scenarios may affect the amount or timing of your payments.

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 lenders and weighing your options:

  • Read Online Reviews: A good first step is to look for reviews on your potential lenders. 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. 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 their 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 for you, we suggest taking your time and don’t rush the application process if the loan option isn’t right for you. By evaluating your options, you can select the right loan program so that you can have ample cash flow for your business.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].