How to choose the right type of loan for your business

You want to borrow money to grow your small business, whether it’s by hiring new people, easing cash flow problems, stocking up on inventory, or investing in an expansion of your premises. The right business loan could solve all your company’s problems. But which type of business loan is best for your business?

Business owners today have a lot of options when it comes to business loans. You can choose a conventional loan from a bank or one backed by the Small Business Administration (SBA). You could choose a business line of credit, a business credit card, an invoice factoring loan, a merchant cash advance, or a working capital loan. Here’s how to choose the right loan for your small business.


Ask Yourself What You Need the Money For

When you’re shopping around for small business loans, you first need to consider what you need the money for. Different types of small business loans are appropriate for different purposes. For example, do you need working capital to ease cash flow problems while you wait for a busy season to arrive or invoices to be paid? A working capital loan might be best. Are you looking to upgrade or replace your tools and equipment? An equipment loan, such as the ones available through the CDC/504 loan program might be your best option.

Many business loans can be used for multiple purposes. For example, a 7(a) loan backed by the SBA can be used to purchase equipment or real estate, perform renovations, provide working capital, establish a new business, refinance debt, or build a new building. Funds available through the SBA microloan program can be used to buy inventory and supplies, equipment and machinery, and fixtures or furniture. You can even get a disaster loan to help you recover in the event your business is impacted by a declared natural or manmade disaster.

Consider Your Ability to Repay the Loan

Before you take out any small business loans, you have to consider your company’s ability to repay the loan. While conventional small business loans and those backed by the SBA may have repayment terms lasting several years, many small business loans will have extremely short repayment terms. Loans like merchant cash advances, for example, may have repayment terms as short as 90 days. Interest rates on small business loans can be high, too. Experian reports that the average small business loan interest rate ranges from two to 13 percent. Interest rates on business credit cards, business lines of credit, and merchant cash advances can be even higher. Interest rates for merchant cash advances and invoice factoring loans can be as high as 25 percent – or higher, depending on your credit rating.

So, make sure you know how much a loan is going to cost you before you sign any paperwork, and make sure you’re going to be able to pay it back. A merchant cash advance might be a tempting way to resolve cash flow problems, for example, but you might have to pay it back within a few months – and that could present a problem if you don’t get the business you’ll need to make the payments. If you have the credit score and the ability to wait, it’s often cheaper to choose a conventional small business loan or one backed by the SBA. However, if you don’t qualify for those loans or you need the money fast, an alternative source of funding can be a good option as long as you’re able to repay on time. You don’t want to even make one late payment on your business loan, because paying late can seriously affect your business credit score.

How Soon Do You Need the Money?

If you need money in a hurry to make payroll or provide working capital, you don’t have time to wait for loan approval from a conventional lender. Alternative lenders can help. Many alternative lenders offer a streamlined online application process, and they can give you approval within a matter of a few minutes to a few days. While interest rates and fees might be higher with a merchant cash advance, business line of credit, or invoice factoring loan, the rapid processing times and quick financing can make these lending options perfect for when you’re in a bind and need money right away.

When it comes to funding your small business needs, you need to be careful to choose the right loan product. Consider your ability to repay, what you need the money for, and how fast you need it. The right loan product can make all the difference for your business.