Capital is critical for business success, but securing it can be a challenge. A small business loan may be the ideal way for companies to get enough money in place to expand, grow, meet current financial obligations, or diversify. The key to do so is knowing what type of loan is right for your specific needs.
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Know What Your Goals Are First
Before applying for a business loan, start by determining your specific needs:
- Decide how much of a loan you need based on your goals.
- Consider how much of a monthly payment your organization can afford.
- Consider a long-term loan, but also one that offers flexibility in borrowing more than one time if this need is likely to be ongoing.
- Estimate the type of benefit or return this loan can provide to you.
- Examine any assets you have to use as collateral.
With this in mind, you can approach lenders to find out what they are willing to offer to you. For most companies, the objective should be a low-interest loan offering enough capital to use as you go, but also with a monthly payment that can be easily made.
Let’s take a look at the types of small business loans:
Secured and Unsecured Loans
For a company that’s well established with a good credit history, an unsecured loan is an option. This type of loan strategy does not require any assets, which means your investments such as your building, equipment, or vehicles remain protected. Secured loans are typically ideal for those who want a lower interest rate.
Here’s how they compare:
- Secured loans use the equity in assets, such as real estate, to back up the loan value. Should you default, the lender can seize that property or work through the foreclosure process. The benefit is that secured loans typically have a significantly lower interest rate and are easier to obtain.
- Unsecured loans do not have collateral backing, which makes them more of a risk to lenders. That drives up the cost of overall interest paid to you. It also makes it harder for a borrower with a lower credit rating to secure these loans.
Often, companies need funding for a short period, such as a few months. This may be due to a down season or preparing to add inventory before the busy season begins. In these situations, short-term loans may offer some help. However, these typically have a higher interest rate, which makes them more expensive to use. They also can provide immediate funding when you need it in an emergency, and you can use the funds for any need necessary.
What’s important to remember is that you do not have long to repay these loans. Most of the time, the payments are weekly and paid off within two years, making the amounts higher, too.
Some companies may need to purchase new equipment to expand or improve operations. An equipment loan can facilitate that. Nearly any type of business equipment may fall under this category, including vehicle purchases. The equipment is security for the loan; if the borrower defaults on it, that can lead to a loss of that equipment. However, equipment loans tend to be affordable with lower interest and easier credit qualifications because they are secured. If you are thinking about expanding operations and need computers, factory equipment, new hauling equipment, or other items, this may be the ideal type of small business loan for your needs.
Choosing the Right Business Loan
When approaching a lender to request a small business loan, provide as much information as possible about what you need, what you can afford in a monthly payment, and why this is a good investment for the lender to make in your business. What will this loan help your company do? How can the lender be sure you qualify for the loan?
Once you do this, the lender can offer a quote for an available loan that may work for you. Before you accept it, there are a few things to keep in mind that could play a role in overall costs.
- Interest rate. This is the most significant cost factor for business owners. The lower the rate is, the more affordable the monthly payments will be. However, the more cost-effective the borrowing will be, too.
- Loan term. This is the length of the loan. Short-term financing is typically under two years, but most secured loans can last for much longer, often up to a decade or more. Longer terms can translate into lower payments, but it also extends the amount of time interest has to build on the loan.
- Funding access speed. Some companies need capital in hand right away to manage current needs. Secured loans can take a week or longer to secure. A short-term loan may be funded faster, putting money in your hand sooner.
- Business control and ownership. For large-scale loans, including startup funding, some lenders may wish to own a piece of the business. This can be done in various ways, but borrowers need to consider how much control they would lose before making that decision. Not all loans require this.
- Small Business Administration (SBA). Work with your lender to determine if they can help you secure an SBA loan to potentially reduce some of the costs.
Take the time to consider several types of small business loans. Look at each of these features and the monthly payment to determine the best option for your needs.
Compare Loan Options to Determine What’s Best for You
While you want an affordable loan for your company, you also want to ensure the loan supports your business’s long-term growth. Choosing a local lender can help because they can provide a much more effective strategy for immediate funding and long-term goals.
To make sure you get just what you need and that you’re managing your business’s financial objectives, determine what loan options are best for you. Small business loans can propel your business forward, providing you with new opportunities to save money and grow your company. For that to happen, you need the right lender behind you throughout the process.