How to Decide Which Type of Small Business Loan is Right for You
Once you settle on the idea of applying for a business loan, it’s time to choose what kind of loan you’ll apply for. However, with so many options, it can be difficult to make the right choice. The following guide will help you make an informed decision when choosing a small business loan:
1. Research the Loans
As you search for the right small business loan, you’ll encounter the following types of financing options:
- Standard Business Term Loans: These loans offer a set amount that must be paid back over a certain period of time. They can be repaid with fixed payments each month.
These loans often have 4% – 10% interest, with terms ranging from 3 months – 10 years.
- SBA Loans: These loans have the same structure as term loans do. However, the terms and requirements differ.
These loans often have 5% – 10% interest, with terms ranging from 3 years – 25 years.
- Business Lines of Credit: With most business lines of credit, borrowers can have a revolving limit that they can borrow from whenever they need to. Payments are made whenever money is borrowed.
Though it depends on the lender, Kabbage’s lines of credit carry APRs that are between 24% – 99%. Borrowers may make monthly payments as a percentage of the borrowed amount, plus a fee between 1% – 10% of the borrowed amount.
- Merchant Cash Advance: With a merchant cash advance, borrowers receive their capital as a lump sum to be paid back with a fixed percentage that is taken out of their daily credit and debit card sales.
Square Capital and OnDeck have a factor rate starting between 1.09 and 1.16. Square Capital offers terms for 18 months, while OnDeck’s terms range between 3 – 36 months.
- Invoice/Accounts Receivable: The lender will purchase the borrowers outstanding invoice/receivable at a discounted price. Borrowers will be paid right away.
With United Capital Source, borrowers will be charged factor rates that start at 5.8% for 24 months or less.
- Equipment Financing: With equipment financing, borrowers receive financing that allows them to pay for equipment. Fixed payments will be made every month.
Interest rates for equipment financing often start with 5% for the first five years.
- Revenue Based Business loans: Also known as a business cash advance, this loan is similar to the MCA. However, payments will be deducted through a fixed percentage from the entire monthly revenue.
Factor rates for revenue based business loans start with 9% for a period of 3 – 10 years.
2. Consider the Functionality of Each
Once you have a clear idea of the various available loans, you must consider why you want the loan. Each loan is designed with a specific purpose in mind. Once you know what you hope to gain from the loan you are applying for, you’ll be able to better determine what loan to choose.
Consider a basic goal. Do you have bills that need to be paid? Is there equipment that is essential to your business practices? Will this investment make it easy for your company to pay off debt? By answering these questions, you’ll be able to choose a payment structure that poses the least risk.
3. Determine Your Plan for Repayment
Once you choose your ideal loan, you’ll eventually have to repay it. Consider this while you decide what loan is better for you. Are there any major expenses on the horizon? Does your business often experience cash flow gaps? These questions may be difficult to answer, but they’ll help to inform your decision.
Some business loans are designed with specific repayment systems in mind. With these loans, you’ll be able to avoid making considerable payments as you are trying to purchase other pertinent things.
4. Compare Business Lenders
Each business lender will have their own strengths and weaknesses. Banks often offer the cheapest loans, but they are the hardest to qualify for. These banks also require the most paperwork. If you don’t want to deal with the hassle, there are other options.
Many borrowers opt for convenient online lenders like OnDeck or Kabbage. Make your choice in business lender based on your ideal business model and your desired program.
There is a reason that choosing a business loan isn’t a quick decision. Though it can be tedious, taking time to make the right decision will ensure that you are able to repay your debt in a timely manner. Keep this guide in mind as you work on deciding what small business loan is right for you.