How To Determine What Is The Best Type Of Business Loan For You?

As a business owner, getting loans is one perfect way to grow your business. But you need to understand the various types of loans available and which ones are the best for your business. 

In this article, we take a look at the various types of business loans and how to select what’s most appropriate for your business. That way, you’ll be confident when applying for loans.

Keys To Determining Which Type Of Loan Is Best For Your Business

Evaluate The Lender

Here’s what to look for from a financier when shopping around for business loans:

• How reputable is the lending entity?
• Are the lending processes and policies customer-friendly?
• Conduct a review online and among peers who have borrowed from the financier to evaluate their experience
• What’s the turn-around time for loan applications?
• Does the lender have an understanding of the unique context of your industry?

2. Evaluate The Business Loan

There are various parameters to consider when it comes to business loans: 

• The repayment period; the longer the period, the more costly but it allows for repayments that can accommodate your business cash flows
• What proportion of your request is the lender willing to finance? That will determine how much capital you need to raise to finance the project.
• Is the lender asking for support to guarantee the loan? 
• How accommodative is the bank when you cannot make repayments on time?

3. Read The Fine Print; Covenants

Sometimes, lenders may spell out terms and conditions that govern the award of a business loan to a client. 

Typically, smaller loans have less flexible terms compared with bigger bank loans.

Acquaint yourself with the fine print before signing for the loan. The consequences of disregarding a lender’s terms may lead to the lender’s cancellation of the entire loan. 

Common covenants may include:

• That the business furnishes the lender with financials annually.
• A prescribed percentage of the client’s sales is banked in the customer’s account with the lender.
• The capping of the borrower’s debts.
• The payment of all business taxes.

Different Types Of Loans Available To Businesses Owners

1. SBA Loans

The loans present less risk to the lender as they’re partially guaranteed by the U.S Small Business Administration (SBA).

The loans range from $25,000 to $5 million and have a repayment term of up to 25 years. 

2. Startup Business Loans

Startup business loans cover business startup costs like purchasing machinery, inventory, and working capital.

3. Equipment Financing Loans

Equipment financing loans help businesses to acquire equipment and machinery for the company. You can use the proceeds from these loans to make purchases for equipment.

The terms of this loan are more flexible, given that the equipment is also used as collateral for the loan. 

4. Working Capital Loans

Working capital loans cater to short-term funding gaps to meet the needs of running the business routinely. Such conditions may include paying for utilities or managing the payroll. 

5. Term Loans

With term loans, a lender funds a business by offering a lump sum amount that the company pays back in installments over an agreed time.

You can access term loans through conventional lenders or fintech companies that offer online loans.

6. Business Line Of Credit

A business line of credit allows a business to access a prescribed credit line as the need arises. There is no obligation to repay the amount immediately. You only pay the interest on the amount used. 

How Do You Apply For A Business Loan 

• Shop around for the most suitable lender
• Evaluate your borrowing purpose and how soon you need the funds
• Prepare all the necessary paperwork
• Comply with the lender’s eligibility criteria
• Submit your application

Conclusion

Reach out to available lenders for the most appropriate business loans for your business.