03/26/14

What Type of Small Business Loan is Right for Your Business?

The first place most business owners go when they’re looking for a small business loan is their local bank. Unfortunately, for most of them, about 90 percent, the local bank isn’t where they’re going to find the loan they’re looking for.

The good news is that there are more options today than ever before, small business owners simply need an open mind and need to answer a few relatively simple questions to determine what type of loan is best for them:

  1. What do I need the money for? In many cases a traditional low-interest term loan or line of credit is what most small business owners think they need. And, in many cases a traditional loan or line of credit could be a perfect fit, but not always. Although the low interest rate and longer terms might be appealing, if the business owner needs the cash to take advantage of an unforeseen opportunity, the weeks or months it takes to apply, have the application go through underwriting, and ultimately get funded will likely take too long and the opportunity could be gone by the time the loan is approved and funded. Although the interest rates are often higher, there are a number of non-bank alternative opportunities that allow the small business owner to access capital quickly—often within 48 hours or less. For example, if the business has a regular and predictable flow of credit card transactions every month, a merchant cash advance could be an option.
  2. What is my credit score? Although most lenders understand it doesn’t take a perfect credit history to be a good borrower, the better the credit score the more options a borrower will have at his or her disposal. Borrowers need to take an honest look at their credit score and objectively approach those lenders who will most likely be able to help them. A recent borrower frustrated that he didn’t get a low-interest loan offer from a traditional bank thought he was being taken advantage of because he had recently purchased a new truck at a nine percent interest rate from a bank. What he failed to realize was that a nine percent interest rate on an auto loan doesn’t indicate a good credit score when those with good  credit score are seeing auto loan interest rates at one, two, and sometimes even zero percent interest rates. Objectively evaluating where you are is important when considering loan options.
  3. Am I disciplined? The other day I spoke with one of the lenders on our platform about credit card financing. He suggested a small business owner with the discipline to stay on top of monthly credit card payments can often take advantage of zero percent card offers and leverage credit card debt to successfully fund his or her business for a lot less than a long-term, low-interest rate loan. However, if you aren’t self-disciplined enough to stay on top of things, it’s easy to get buried this way.
  4. Am I flexible? Most small business borrowers aren’t small business financing experts and should be prepared and flexible enough to investigate all their financing options, not just those that are from a traditional financing source. Being flexible will allow a borrower to consider all their options, weight the pros and cons, and ultimately choose the loan that’s best for their business and situation.

Honestly answering questions like the above will help a small business borrower find the right loan for his or her individual circumstance. There really isn’t a “one-size-fits-all” small business loan option. Depending you history, industry, loan purpose, and other factors, there might be several options that could fit the bill. Which is a good thing.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

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