There are many loan options for small businesses, from equipment loans to working capital loans. As a small business owner, you’ll likely decide between a few lenders: The Small Business Administration (SBA), conventional banks and alternative lenders. Each offers their own benefits and disadvantages.
“While there are numerous options from which to choose, not all deliver the same benefits,” said Tom Coletta, SVP for commercial banking at Axiom Bank. “Make a short list of potential lenders by shopping around to compare offers. As you go through the process, keep in mind that bigger isn’t always better – or safer.”
Depending on your needs as a business, you’ll want to understand all your choices before settling on a lender. Here’s everything you need to know about getting a loan. [See related: Business Loans and Financing Options]
Types of loans
There are many types of lenders and loans to choose from. Here are some of your options.
Traditional bank business loans
According to Jay DesMarteau, head of commercial specialty segments for TD Bank, traditional bank loans typically have low interest rates, a detailed payment schedule and the ability to retain total ownership of the business.
“Banks also offer loans for many different purposes: real estate, working capital, lines of credit and equipment among others,” he said. “A line of credit would most often be used for short-term funding needs, while a term loan or commercial real estate mortgage offers multiyear financing for expansions or to purchase property.”
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These government-backed small business loans are safe and attainable for businesses that might have been turned away by other lenders. They offer some of the lowest interest rates available and often have lower monthly payments, said DesMarteau.
“SBA loans allow approvals in some cases, such as when the down payment or a business’s cash flow is too low, because of the government guarantee,” said DesMarteau. “There is a misconception that SBA loans are a startup loan and that the government gives them away, but it is true that they have different credit underwriting standards, terms and other factors than a traditional small business loan.”
Bad credit loans
There are other funding options for small businesses aside from traditional bank or SBA lenders, like online lenders, direct alternative lenders or lending marketplaces. This is a popular option for those with bad credit.
But while they might have a short approval time, there are some downfalls of alternative funding, like double-digit interest rates, short payback time, less control over the business, etc., said DesMarteau.
Secured loans are easier to acquire than unsecured loans because they require collateral from you. This type of loan is often suited for new businesses with startup costs – $50,000 to $100,000 loans.
If you have good credit, you can potentially get up to $50,000 unsecured loans. However, startups with business owners who have poor credit are often turned away. If you can acquire an unsecured loan, you don’t need to offer any collateral – which is a major plus for business owners.
Long-term business loans
Long-term loans are geared more toward expanding your business rather than starting it, offering up to $100,000. They can be paid back for years and at lower monthly rates. However, they aren’t typically suited for startups, but rather for more established businesses.
Points to consider
Make sure you sort through the following factors before seeking a lender.
Before choosing a loan, you need to outline your objectives for your company in a business plan. This should give you a good idea of the type of loan you need.
“Prior to meeting with a banker or lender, it is important to have a business plan in place – preferably one that has been reviewed by your certified public accountant,” said Coletta. “The plan should include articulated short- and long-term financial goals.”
Ask yourself what you need to reach your goals and what you’re lacking. From there, find a banker who can anticipate the growth of your business and craft a lending solution, added Coletta.
Your cash-flow cycle directly impacts the type of loan needed for your business. Consider your payment cycle, the flow of cash in and out, and the best way to maintain a steady revenue.
“Make sure you have a solid grasp of your accounts receivable and that your banker understands your payment mix,” said Coletta. “For example, many large corporations, medical insurance companies and government entities have lengthy pay cycles – even up to 90 or 120 days. Talk with your banker about how these factors affect your cash flow so he or she can design an appropriate solution.”
Calculate your expenses to get an idea of how much money and what exactly you’ll be needing from your potential lender.
“Do you have a realistic understanding of both current and potential expenses?” said Coletta. “Take a look at the size of your business and its growth potential.”
For instance, he noted, if you have one office, you might not need to hire an HR professional right away. But this could change down the line if you decide to grow your business.
There are always risks involved with finances, especially when seeking the right loan for your business. That’s why it’s important to discuss concerns right away and be transparent with your intentions.
“Conversations about risk should happen upfront,” said Coletta. “Banks look at debt levels, cash flow and liquidity carefully. It is important to understand your bank’s guidelines in these areas.”
The higher your debt to equity ratio, the riskier it appears to bankers and the more difficult it will be to attain a loan. If you have any weaknesses in your business model or financial history, disclose them upfront and work around those issues with the help of your banker, said Coletta.