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It is one of the realities of small business and one of the most difficult decisions an owner will face: taking out a loan. Whether you’re aiming to grow your company or just keep afloat, a small business loan is an essential tool in the businessman’s toolbox. Generally, some form of collateral will be required to secure the loan, and these come in the form of your business’ assets, such as real estate, equipment, etc. Needless to say, there’s a lot at stake.

So here are five factors to keep in mind when considering taking a small business loan.

The Business Lender’s Reputation

Not all business lenders are created equal; some lenders who may seem to offer the best business loans are quite risky.

Here are some red flags that you should lookout for when applying for a small business loan from an alternative lender:

  • The lender doesn’t require a credit score check or have a minimum credit score requirement.
  • The lender lacks a physical address and doesn’t have a professional website.
  • They hides their loan fees, making it unclear how much their financing options will cost your business.
  • The sales rep pressures you to accept the business loan offer immediately.

    Loan Type 

    Like personal loans, there are many types of small business loans on the market. These loan options include:

    • Traditional term loans: These loans come with set amounts and terms.
    • Business lines of credit: If you take out a line of credit, you’ll have a set funding amount that you can borrow against and repay as needed.
    • Equipment financing: If you need financing for equipment, an equipment loan will likely fit your needs.
    • Merchant cash advance: Business owners that accept frequent credit card payments can receive lump sum financing in the form of a cash advance. Instead of set repayment terms, you’ll remit the advance based on the credit card transactions you have at the time.
    • Business credit cards: Although many business owners have credit cards, you must avoid overspending and pay off your balance each month.
    • Invoice factoring: If you have outstanding invoices, you can sell them to a factoring company. They’ll provide you with funding, but you’ll be charged a factoring fee for their services. Then, they’ll be in charge of getting customers to pay off their outstanding invoices. f
    • Small Business Administration (SBA) loans: If you can’t qualify for a traditional bank loan, you may qualify for financing from the SBA.

    Before accepting a business loan offer, make sure that the type of loan fits your unique financing needs. In addition, you may not qualify for all of these options. Some of these funding programs come with considerable funding requirements, and the lender may want to review your credit report, bank statements, and other financial factors.

    Collateral Requirements

    Some business financing lenders offer secured loans, which means in order to qualify for a business loan, you’ll have to back the loan with collateral. Therefore, in the event that you default on your loan, the lender can seize your collateral as a result.

    If your business loan offer requires you to secure the loan with collateral, consider whether you want to risk losing an expensive asset. If not, an unsecured loan may be the best funding option for you.

     Loan Repayment Terms

    Take a close look at the repayment terms on your loan offer. Ask yourself whether the monthly payment fits comfortably with your budget.

    If you think it will be difficult to afford the payments or you’re worried about missing payment deadlines, look elsewhere for a business loan product. Late and missed payments as well as default can lead to financial stress and take a serious toll on your credit.

    Payment Process

    The payment process is just as important as the repayment terms. Make sure you understand the lender’s requested payment process. Will you pay back your loan via weekly payments, monthly payments, or bi-monthly payments?

    You should also find out how you’ll make the payments. If the business loan lender requires automatic withdrawals and you don’t feel comfortable with that, you may want to pursue a different business loan offer.

The Amount of Money You Need

Determining the amount of money you need is the first step. It isn’t always possible to pinpoint precisely how much you need, but try to be realistic and include any upcoming expenses you may have. Applying for too little will mean you’ll be short and then have to apply for more funding, wasting time and slowing down your processes. Applying for too much money sticks you with paying unnecessary interest.

How Soon You Need the Funds

With most things, planning gives you more options and more time to find a loan that best suits you. If you know you’ll need money in the upcoming months, it’s best to start researching and applying for a loan a few months before. Some loans take longer to approve but may have more favorable terms.

If you need a loan in an emergency, you may have fewer options and be forced to take a loan with high interest and less favorable terms.

Lender Options

Small businesses are not always eligible for business loans from traditional lenders like banks. Conventional lenders usually require a small business to be financially stable and in operation for at least a year before providing funding.

However, other lenders like government programs, non-profits, and smaller community banks offer loans specifically designed for small businesses.

Loan Options

There are various loan options for small businesses, so shop around and select the one that best suits your needs. Popular loans include:

  • SBA Loans

SBA loans are ideal for small businesses that only require a small amount and don’t qualify for a traditional loan. The average loan is around $13,000 and cannot exceed $50,000. The government backs these loans, but you’ll need to apply through a lending institution.

  • Business Line of Credit

Like a credit card, a business line of credit allows you to borrow money from the line of credit only when you need to and you only pay interest on the amount of money you use. When you repay the borrowed money, the line of credit is replenished so that you have revolving credit whenever you need it.

  • Personal Loans

Personal loans are versatile, so you can use them for anything, including funding your business. A personal business loan might be a good option if you’ve got a good credit score.

Many personal loans are available, each with different interest rates and terms that can vary by state. For example, the rate you’ll get for personal loans Kansas City will be different from the rate you’ll get for the same or similar loan in New York.

Pay Attention to the Terms

When you receive loan offers, read the terms carefully and compare them. Pay attention to the fees and interest, and be sure you can afford to pay them. Also, look at the payment period and how much time you have to pay them.

Some lenders require monthly installments, while others may require that you pay a lump sum. Only sign a loan agreement if you’re comfortable with the terms and confident you can manage the repayments.


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