Whatever the state of your business, a small business loan can provide the capital you need to help achieve your goals. Applying with your bank might seem like the obvious way to go. It allows you to keep everything under one roof, helpful for busy entrepreneurs who need to keep things organized. But it might not be the best way to go, because you could miss out on better options and products from other providers.
It’s well worth looking at all your options so you can get the best terms and rates. Here’s how to find the best small business loan option for you, and how to decide if it makes sense to get this type of financing in the first place.
Does a Small Business Loan Make Sense?
First, make sure a small business loan is your best option. Small business loans are not the only way to fund and run your business. Depending on your long-term goals, you might opt for a line of credit, get a small business credit card or even seek out investors. Before you borrow, consider the potential downsides. For one, you may have a hard time getting approved if your business doesn’t have established credit and your personal credit isn’t great. Some lenders require collateral for a small business loan, which you lose if you default on the loan. A loan may be a source of unnecessary risk and expense if you can raise the money through revenue and profits instead. Additionally, paying that loan back is a long-term financial commitment. If your profits can’t keep up, it could put you in a precarious position. (For related reading, see: 4 Steps to Getting a Small Business Loan Without Collateral.)
Why You Should Consider This Form of Financing
That said, there are plenty of good reasons to leverage a small business loan. First, small business loans can be a type of good debt. Good debt is a small liability with calculated risk, which you then leverage as an investment. Your business is an asset with the potential to appreciate in value. A small business loan allowing you to do so can be a great financial tool. Typically, small business loans offer lower interest rates than small business credit cards. If you need financing, it may be less expensive for you.
It may also be a better route than seeking out investors. Unlike investors, commercial lenders don't want a say in how you run your business. Other than your terms of repayment, lenders don't take a percentage of your profits. And finally, a loan can help you build up your company's credit history, which is separate from your personal credit history.
Best Small Business Loan Options to Consider
If you’ve decided getting a small business loan is right for you, here are the top three lenders you can consider in your search. Depending on your needs and where you are in your business, one of these options might be best for you over the other two. Even after you check out these options, don’t hesitate to shop around and compare rates if you know of other lenders you might want to work with.
If You’re Just Starting Out: SBA Microloan
When you’re starting your business, it can be extremely difficult to find a bank willing to lend to you. The bank doesn’t have any credit history to consider when determining whether or not you’re a risky borrower (which also influences the interest rate they’ll offer you). You can go through a qualified local lender to apply for a Small Business Administration (SBA) microloan if you’re in this situation. You can borrow up to $50,000, but the average loan in the program is $13,000.
These loans are also fairly cheap, with interest rates running between 8% and 13%. The specific rate you qualify for will depend on the lender you choose, your credit history and credit score, and how much you request to borrow. The SBA microloan program allows for repayment periods up to six years—although, like your interest rate, that will vary from borrower to borrower. Expect to put up collateral to qualify for this loan and meet the lender’s credit requirements. Be aware it can take a while to get approved, too. You’ll want to plan ahead before applying. (For related reading, see: Expanding Your Small Business With an SBA Loan.)
If You Have Bad Credit: Fundbox
Don’t have business credit? Is your personal credit less than stellar? It can start to feel impossible to get a small business loan from traditional lenders. But you still have options. Fundbox doesn’t even have a credit score requirement for borrowers. The lender offers two different ways to get business financing: invoice factoring and a line of credit you can draw upon for a specific period. For invoice factoring, you can borrow up to $100,000. You have 12 to 24 weeks to pay off the loan. Fees start at 4.66% to 8.99%, depending on which repayment period you choose.
If you’d rather have a line of credit, Fundbox offers up to $100,000 for that as well. There’s no collateral required or even a personal guarantee. The lender typically charges a fee of 0.7% per week on the amount of credit you use. You’ll need to repay your balance within either a 12-week or 24-week period. That means withdrawing $1,000 will cost you $7 per week until you repay that amount in full. While Fundbox doesn’t require a credit check to apply, they do require you to have been in business for at least three months before they’ll consider your application.
If Your Business and Credit Are Well Established: SmartBiz
SmartBiz offers SBA 7(a) loans but without the lengthy application and funding process. You can borrow anywhere between $30,000 and $350,000 (or more if you’re in commercial real estate). Borrowers receive funds on accepted loans within seven days, and make payments over 10 to 25 years. SmartBiz loans are well worth considering because of their relatively low interest rates that range from 6.36% to 9.57%. You’ll need to check a number of boxes to qualify, however.
- Owning a U.S.-based business for at least two years
- A personal credit score of at least 650
- At least $50,000 in annual revenue
- No outstanding tax liens, bankruptcies or foreclosures in the past three years
- No recent charge-offs or settlements
- Being current on any other government-related loans.
If you meet the requirements, SmartBiz is a solid option for your business financing.
What to Consider Before Taking a Small Business Loan
Whether or not your company's cash flow is stable, taking out a small business loan is a big financial commitment. You’ll want to ask yourself the following questions before you move forward and request financing.
Do You Have Cash Reserves?
If something goes awry and your cash flow dries up, that could put you at risk of defaulting on your loan. It’s wise to have cash reserves in case of emergency. If you don’t have reserves and your cash flow is irregular already, you might want to focus on building in a stable, reliable stream of revenue via other means before looking for loans.
What’s Your Credit Like?
There are some lenders that don’t require a credit check, but if you don’t qualify there for other reasons, your options dry up pretty fast. You need a credit history and a strong credit score to qualify for most loans. Consider taking a few months to boost your credit score to improve your chances of getting approved. You can do this by taking out a business credit card, making regular payments on your bills on time and in full, and by watching your credit utilization ratio (keep it at 30% or less). (For related reading, see: 3 Easy Ways to Improve Your Credit Score.)
How Much Money Do You Actually Need?
Don’t go into this decision without knowing exactly what you need (which might be very different than what you’d like to have). If you take out too much, you’ll pay more in interest (and might have a tough time paying back the full balance when it’s due). If you take out too little, you could fall short of your goals. Analyze your goals and current financial situation to determine the best dollar amount.
When Do You Need It?
Some lenders offer to fund within a week or just a few days. Others, however, can take weeks or even months to go through the application and funding process. Start the process well in advance of when you actually need the money and consider funding timeframes with each lender.
Do Your Due Diligence Before Applying
Taking out a small business loan is no small decision. To make sure you’re getting the best loan for your business, consider several lenders and their interest rates, fees and eligibility requirements. Make sure, however, to first consider the pros and cons of getting a small business loan and your financial needs when applying. If you do your due diligence, you’ll be in a better position to get the funding you need when you need it.
(For more from this author, see: How Small Business Owners Can Create Cash Flow.)
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