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Here’s How to Choose the Business Loan That’s Right for You

Consider these six criteria before you decide.

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SMALL BUSINESS OWNERS often face financial challenges that require outside financing, and taking out a loan is a common solution. But choosing the right business loan can be challenging, especially for small business owners who are not familiar with the lending market.

Here are some of the most common types of business loans that small business owners can consider.

1. LINE OF CREDIT LOANS. A line of credit loan provides a small business owner with access to a set amount of funds that they can draw upon as needed. This type of loan can be useful for businesses that need flexible financing, as they only pay interest on the amount they borrow.

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2. TERM LOANS. Term loans are a lump sum of funds that are paid back over a fixed period of time, typically with interest. This type of loan is ideal for businesses that need a large amount of funding for a specific purpose, such as purchasing equipment or expanding operations.

3. PEER TO PEER LOANS. The growth of the internet has seen many businesses turning away from the traditional lending market and seeking loans from peer-to-peer platforms and private lending companies. This can be an effective niche for acquiring finance in areas not covered by traditional lenders, whose strict criteria on assessing debt can leave little room for alternatives.

When choosing a loan, small business owners should consider several factors, including:

  • INTEREST RATE. The interest rate on a loan will impact the overall cost of the loan and the monthly repayments. Compare interest rates offered by different lenders to find the best deal.
  • REPAYMENT TERMS. The repayment terms of a loan, including the length of the repayment period and the frequency of repayments, can have a significant impact on the overall cost of the loan. Choose a repayment plan that fits your budget and cash flow.
  • IMPACT ON PERSONAL CREDIT. Some loans, such as SBA loans, do not require personal guarantees, while others may have personal guarantees as a condition of the loan.
  • PURPOSE OF THE LOAN. Choose a loan that fits your specific needs. For example, a line of credit loan may be ideal for businesses that need flexible financing, while a term loan may be better for businesses that need a large sum of funding for a specific purpose. Peer-to-peer may work best where the collateral is a higher risk security (e.g., a property development).
  • LENDER REQUIREMENTS. Consider the requirements of different lenders, including their credit score, revenue and length of time in business. Some lenders may have more stringent requirements than others.
  • COLLATERAL/SECURITY. What must you come up with to satisfy the lender’s collateral criteria? Are you comfortable with this? What will its impact be going forward?

By carefully considering these factors, small business owners can find the loan that best fits their specific needs and helps their business succeed.

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