How to Select the Best Small Business Loan
Of course, even the best small business loans cost money. Plus, what makes a small business loan “the best” depends on your unique business needs.
Therefore, to select the right loan, we recommend evaluating a variety of external factors, including the type of loan, and internal factors, like your reason for pursuing a loan.
To help you with that evaluation, we’ll walk through what you need to consider to select the best small business loan.
Why Do You Need Business Financing?
If you’re looking for the best loans for 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 find the ideal financing fit.
Getting specific means determining what you plan to use the financing for plus when and how much money you’ll need. It’s also a good idea to consider the reason why you might not pursue financing. Even if you’re certain you’ll take out some kind of small business loan, evaluating decisions from multiple perspectives often generates unexpected, useful insight.
Also, once you’ve determined why you need financing, you will have narrowed down your loan options. So, the next step is to explicitly identify the types of financing you’re going to consider.
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 now 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 Loans
- Professional Practice Loan
- Invoice Factoring
- Business Lines of Credit
- Merchant Cash Advances
- Working Capital Loan
- Franchise Startup Loan
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 loan 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.
This is why it’s so important to put together a detailed budget with projections, even if your lender doesn’t require it. 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 funding and your ideal loan type and amount, it’s time to get into the details of your potential loan options. That means taking a look at each of the loan options you’re considering and reviewing their terms, restrictions, and fees.
To get the entirety 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 have to repay it.
Also, you may only incur certain fees, such as a prepayment penalty, in specific circumstances. So it’s important to understand how different scenarios may affect the amount or timing of your payments.
Vet Your Lender Options
The best small business loans come from the best lenders. So, once you’ve familiarized yourself with the structure, purpose, and terms of your loan, it’s time to research your online lender.
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.
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. They should be able to help guide you through the 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 Find the Best 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 the amount and type of loan as well as the costs and benefits to your business.
To ensure you select the right option for you, we suggest taking your time and don’t rush an application process if the loan option isn’t right for you. By evaluating your options, you can select the right program so that you can have ample cash flow for your business.
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.