A Short-Guide to Choosing the Right Small Business Loan

Many business owners need to borrow money at some point to grow their business, but with many options available, choosing the kind of loan that makes the most sense for your business can be confusing.

When evaluating small business loans, it is important to first assess your current needs and situation. Some questions you need to answer are:

  • How much do you need to borrow?
  • What will you use the money for?
  • How long will it take you to pay the loan in full?
  • Do you have any collateral? If yes, what are they?
  • What is your credit score?
  • How long have you been in business?
  • Is your business in good financial health?
  • Do you have other outstanding loans?
  • How soon do you need the funds?

After you’ve clarified your needs and the status of your business, you can now look at the different loan options and choose the most suitable one. Here are some of the common types of small business loans.

Small Business Administration (SBA) Loans

With an SBA loan, the government guarantees a big part of the loan, making the loans less risky for lenders and more favorable to borrowers. However, you will need to submit a lot of paperwork, pay additional fees, and wait a long time to get approved.

There are four types of SBA loans:

7(a) Loan — This is the most basic and flexible SBA loan. You can use the money for debt refinancing or for working capital. You can also use the funds to buy equipment and furniture, to buy real estate, to build or renovate buildings or to expand your business. You can borrow up to $5 million, payable within 10 years if used for working capital and within 25 years if used for fixed assets.

Microloan — You can borrow up to $50,000, payable within six years. You can use the money for working capital or to buy inventory, furniture or equipment, but not for paying other debts or buying real estate.

CDC/504 Loan — This loan provides borrowers with a long-term, fixed-rate funding and can be used to purchase real estate and machinery, to build or renovate facilities, or for debt refinancing related to business expansion. A 504 loan cannot be used for working capital or to buy inventory, however.
More information: https://www.gbcib.com/commercial-sba-504-loan-program.htm

Disaster Loan — The SBA offers qualified businesses low-interest disaster loans of up to $2 million. These loans can be used to repair or replace assets damaged or destroyed in a disaster.

Bank Loans

Traditional bank loans have low interest rates. Compared to SBA loans, getting approved is faster but repayment times are shorter. Banks, however, have strict requirements, so their loan approval rate is much lower than that of alternative lenders.

Loans from Alternative Lenders

Alternative lenders are less strict when it comes to requirements and will lend money to small businesses even if the business has a less-than-stellar financial history. With most alternative lenders, you can apply online, get approved shortly, and receive the funds within days. However, these loans will have higher interest rates than bank loans.

Banks and alternative lenders offer small business loans that are similar to those available through the SBA. They also offer additional loan options, such as working capital loans and equipment loans.

In addition, alternative lenders offer other types of funding, such as merchant cash advance, lines of credit, and invoice factoring. These options are easy to qualify for and provide fast access to funds but charge high interest rates, so be sure to read the terms carefully.

There are many loan options available to small businesses but there are also many things to consider when choosing a loan. Being clear about the purpose of your loan, looking at your business through the perspective of lenders, and understanding the differences between the different loan types will help you make an informed decision when borrowing money for your business.

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