Whether your business is facing a temporary shortfall of money or you're planning to expand operations, a small business loan is an ideal financing option. One of the biggest advantages of business loans is the convenience. You have the option to approach a wide variety of lenders and seek a suitable loan.
However, shopping for a small business loan isn't something many entrepreneurs fancy doing. There are often too many nuances involved or too many risks in the offering, and some lenders can make the application process harder than it already is. But what if choosing the right cash advance option could actually be as easy as following four simple steps? Keep reading to learn what they are and how you can apply them to your small business loan search.
1. Figure Out Your Budget Needs
Start by drafting a comprehensive business budget to determine the actual amount you need to keep your business afloat. The loan amount you're looking to acquire should be enough to offset your current and ongoing expenses.
If the amount is insufficient, you'll get nowhere near your goals. If it's too much, you'll be incurring an unnecessary expense, which could deal a big blow to your cash flow. So be wary not to undercut or overestimate your budget. Work with realistic figures from the get-go.
2. Check the Lender's Track Record
Some lending institutions act all nice in the beginning, only to unleash terror when you miss a single payment. That's unfortunate, but it's something you can avoid if you do your due diligence early on in the process.
A lender will talk so much about their “flexible and cutting-edge” loan options, but don't believe any word of that until you can actually prove it. Reach out to your business contacts and inquire about their experience with a particular lender, what they did and didn't like about them, and what the lender looked for in a financing proposal. Hectic as that may sound, it'll help you choose the right small business loan the first time.
3. Shop Around for the Ideal Type of Loan
There are at least nine different types of small business loans widely available today. Going by that number, you have many financing options at your disposal, which should work to your advantage. You can easily find a loan that works for your unique requirements. However, be careful not to be a victim of the shiny object syndrome.
Evaluate each loan option exhaustively and without bias, even if it'll take weeks to do so. This is a significant step for your business. There is no point in rushing into a trendy loan option, only to be frustrated by a lengthy approval process or high interest rates. Take your time.
Before committing to a lender, consider two critical factors: loan term and loan size. Longer terms translate to higher borrowing costs, while a large loan amount reflects a lender's commitment to your project. Weigh where the perks are and act accordingly.
Another crucial factor you should think through before putting pen to paper is the lender's flexibility on repayments. You want a lender who understands that growing a small business takes time and patience and one who'll hold your hand from the onset. Whether you prefer to make variable deposits based on your sales or fixed payments after specific time periods, the right lender will have flexible financing solutions designed just for you.
4. Consider the Interest Rates
A lender might have the most attractive loan terms on the planet, but if their interest rates are exorbitantly high, that's reason enough to avoid them. Acting otherwise can put your young business at risk of closure or bankruptcy before it reaches its true potential.
The average interest rate for small business loans in 2022 ranges between 3% and 7%, according to NerdWallet.com. If you can get a lender who charges lower than that, well and good. That said, be careful if the interest rate seems too good to be true, because it probably is. You don't want to agree to an unfavorable deal. We urge you to meticulously read the fine print to ensure that there are no surprises.
The good news is that it's possible to enjoy incredibly low interest rates if you choose the shortest repayment term possible and boast an impeccable credit score.
You Can Do This
Small business owners can rest easy in the knowledge that flexible business loans are well within reach. All they need to do is do their due diligence from the start, consult deeply and widely, and keep their options open. Carefully choosing a suitable lender and loan is crucial for the future of your business. It takes one good lender and several good loans to build a formidable business empire, so please, choose well.