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Which Loan Option Is Best for Your Business?

10+ min read • Dec 23, 2019 • Grant Olsen

Deciding which loan option is best for your business sounds deceptively simple. It’s almost as though you’re browsing the produce section of your local supermarket, trying to decide if you want a red or green apple.

In reality, deciding which loan option is best for your business is more like choosing a new car. There will be dozens of manufacturers to choose from, all of which offer diverse vehicle options. Do you want to go with fuel, electric, or hybrid? Do you want 4WD, AWD, or 2WD? If 2WD, do you want it powered from the front or rear? And do you prefer an SUV, sedan, or 2-door?

Even if you’ve sifted through the mountain of options and selected the make and model of your car, you’d not be done with the decision process. You’ll then be presented with multiple trim levels.

So it goes when shopping for a loan. Once you’ve narrowed down your best loan options and are deciding between “trim levels,” there’s not necessarily a wrong answer. You’ll just need to sort through a lot of nuances in the form of interest rates, repayment terms, and other details.

“With all the financing options out there, trying to compare business loans can feel overwhelming,” says Business.org. “You can borrow from traditional lenders (banks or credit unions) to get the best deals, or you can borrow from online lenders for lower loan qualifications. You can choose from term loans, lines of credit, invoice financing, microloans, and more. It’s a lot.”

The important thing to remember is that an ounce of prevention is worth a pound of cure. So the more time you spend gathering information and weighing your options, the less time you’ll spend dealing with issues on the back end.

The First Steps

Before you can decide if a car or an SUV is your best option, you need to identify the primary needs the vehicle will serve. Likewise, you’ll need to figure out these kinds of details for the loan you’re seeking.

The first element to consider is how much money you will need to borrow. According to research from the Small Business Administration, the median for small business loans is $140,000. While that stat is informative, it shouldn’t dictate how much you borrow. The point is to figure out exactly how much money your unique situation requires.

You’ll also want to settle on a timeline for the funds, which will largely be determined by what you will use the money for. If you need the money quickly, your options are smaller because many loans take an extended period to connect you with funds. If you have a longer timeline, you can choose from the full array of options.

Here are 10 of the most common financing options:

  1. Business Term Loan
    With amounts going all the way up to $2,000,000, these loans pack a powerful impact. The funds are often available in as little as 2 days, with borrower-friendly interest rates as low as 6%.
  1. Short Term Loan
    Like the smaller, more nimble sibling of business term loans, this financing option moves on an expedited timeline. You can get funding in just 24 hours, though the interest rates are typically higher.
  1. Business Credit Card
    Similar to the personal credit card you probably have in your wallet, a business card is easy to apply for and allows you continued access to a set amount of money. The amounts usually top off around $500,000.
  1. Business Line of Credit
    Here’s another type of financing that gives you access to a revolving sum of money, which you can use at any time. Interest rates begin in the neighborhood of 8%, and you can dip into your business line of credit whenever your small business needs fast funds.
  1. Merchant Cash Advance
    This type of financing lets you borrow money based on your business’s future earnings. You can get as much as $200,000, and it is often available within 24 hours. This convenience can come with a hefty price tag, however, so don’t be surprised if the interest rates come close to 20%.
  1. Equipment Financing
    Purchasing equipment for your business is often a necessity, and it isn’t cheap. This type of loan provides as much as $5,000,000 to outfit your business with the stuff it needs to succeed. And the interest rates are fairly low, beginning around 7.5%.
  1. Commercial Mortgage
    For business property needs, consider a commercial mortgage. Whether you plan to spend the funds on a restaurant, warehouse, office, or retail location, these loans provide you as much as $5,000,000 to make it possible. Better yet, the interest rates start at 4.25%.
  1. Accounts Receivable Financing
    If you’re tired of dealing with your purchase orders and receivables, you can always sell them to a lender. They’ll do the legwork of tracking down the debtors, and you’ll get up to 80% of the value of your receivables.
  1. Startup Loan
    These loans are designed for new businesses and offer amounts as high as $750,000. Plan on a wide range on the interest, spanning from 0% to 17%. Also, be aware the money can take up to 3 weeks to hit your bank account.
  1. Business Acquisition Loan
    Interested in buying an existing business or want to get into a franchise? A business acquisition loan delivers up to $5,000,000 to achieve your dream. Interest rates are quite low, starting at 5.5%, but you should know the loan can take up to a month to fund.

SBA Loans

SBA loans are also popular but deserve a category of their own because they’re so unique. With this kind of financing, the US Small Business Administration (SBA) connects entrepreneurs with loans up to $5,000,000. Each year, the SBA facilitates loans worth tens of billions in total.

What makes these loans different from all of those on the list above is that the SBA doesn’t actually supply the money. Instead, they guarantee a portion of the loans, which encourages third-party lenders to work with borrowers they might have rejected otherwise.

While SBA loans are beloved for their generous rates and terms, they’re also known for tedious applications and slow funding. In some cases, the money won’t reach you for 3 months. So if you need financing in the short term, an SBA loan is most likely a poor fit.

Here are 4 of the most popular SBA loans:

  1. SBA 7(a) Loans
    These loans are ultra-flexible and usually offer great rates. In many ways, they’re the SBA’s version of a business term loan. As long as your business is for profit, is based in the United States or its territories, and you have owner equity that can be invested, you stand a solid chance of getting approved.
  1. SBA Express Loans
    Built for speed, these loans require less paperwork and have a shorter waiting period. As with other expedited financing products, they also have lower maximum amounts. Not quite as flexible as an SBA 7(a) loan, this type of financing must be applied toward debt consolidation, increasing working capital, or financing equipment.
  1. SBA 504 Loans
    If you’re planning to develop your business through operations expansion, an SBA 504 loan can be just the ticket. It’s earmarked for uses like purchasing buildings, renovating facilities, constructing buildings, buying machinery, or buying land.
  2. SBA Disaster Loans
    When natural disasters strike an area, small businesses are often hit hard. These SBA loans help mitigate the damage by providing funds to get a business back to where it was before the disaster. As long as your area meets the qualifications, you can most likely acquire one of these low-cost loans.

Narrowing the Field

As you weigh your options and eliminate financial misfits, you’ll be able to identify a handful of prime candidates. One of the best ways to evaluate your eventual winner is to find out which will provide money at the lowest cost.  You’ll need to look at comparables such as Total Cost of Capital (TCC), Annual Percentage Rate (APR), Average Monthly Payment, and Cents on the Dollar.

Of course, not every lender lists their disclosures the same way. Metrics are treated differently, and definitions can be fluid, making it hard to do your due diligence. Loan calculators are one helpful resource, but sometimes you need more sophisticated tools.

To meet this need, the Innovative Lending Platform Association worked with some of the nation’s best lending platforms to create a comparison tool called SMART Box™ (Straightforward Metrics Around Rate and Total cost). Basically, it’s a Rosetta Stone for the loan world.

“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”

By leveraging SMART Box™, small business owners can better understand their options and make an informed decision. Because with lending, as with just about everything else, knowledge is power.

Applying Yourself

After deciding which loan option is best for your business, you’re ready to begin the application process. This step is a time for careful reading, detailed preparation, and timely submissions. Every document requested by a lender should be considered a requirement, so take care that nothing is neglected. When lenders receive incomplete applications, they often toss them in the wastebasket.

Some borrowers may find it frustrating that lenders are so strict when it comes to applications, but this approach isn’t surprising. After all, your application presents a lender with an ideal opportunity to evaluate your ability to understand details and follow through with precision. If you can do these things in your application, there’s a good chance you’ll also do them in your business, which makes you a safer bet for a loan.

In fact, you’d likely use a similar approach if you were hiring a new employee. Imagine if you emailed a candidate before their first interview, reminding them to bring their driver’s license and a printed copy of their resume. The candidate arrives, sits down in front of your desk, and removes a couple of items from her briefcase. But instead of the requested documents, she gives you a personal essay and a library card.

Needless to say, you wouldn’t be impressed. And that candidate likely wouldn’t get the job.

So what exactly will you need to provide with your application? That depends on the specific lender and the loan. But some of the most common documents include:

  • Credit reports
  • Personal and business tax returns
  • Personal financial statements
  • Personal background information
  • Resume
  • Business plan
  • Projected financial statements
  • Personal and business bank statements
  • Details of potential collateral
  • Business licenses and registrations
  • Articles of incorporation
  • Copies of contracts with third parties
  • Franchise agreements
  • Commercial leases

After you click submit on your application, the lender will review all of the information you’ve provided. Your personal and business credit will be of paramount importance, as it’s a clear metric that can help predict whether or not you’d pay back any money you were to borrow. Good scores not only improve your chances of getting approved but also open the door to more favorable interest rates and repayment terms.

For this reason, it’s advisable to proactively monitor your credit scores and do everything in your power to bolster them. Errors are actually quite common on personal credit scores with the 3 major bureaus, so check them often and amend anything that looks amiss.

By paying attention to the details and making yourself as compelling a candidate as possible, you’ll greatly improve your chances of success. And each positive step you take gets you one step closer to acquiring the ideal loan for your small business.

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.