When you’re starting a business, one of the most important decisions you’ll make is which type of loan to get. There are many different types of business loans available, and each one has its own set of pros and cons.
In this article, we will discuss the different factors you need to consider when choosing a business loan that best suits your financial needs.
1. Intended use of the loan
The first thing you need to consider when deciding on a business loan is what you intend to use the loan for. Different loans have different purposes, and some may be better suited for your needs than others.
For example, if you need a loan to purchase equipment, then you might want to consider an equipment finance loan. These loans are typically used to finance the purchase of machinery, vehicles, or other types of equipment.
On the other hand, if you need a loan to finance your start-up costs, then you might want to consider a business start-up loan or an SBA loan. These loans are typically used to finance the initial costs associated with starting a business, such as rent, inventory, and marketing expenses.
Similarly, if you have outstanding invoices, you can sell them to an invoice factoring company and they will provide you with the funding against a service fee.
For more information, refer to this article from Westpac Bank about business loans.
2. Loan term
The next factor you need to consider is the loan term. The loan term is the length of time that you have to repay the loan. Loans can have short terms, such as one year, or long terms, such as five to ten years.
The loan term you choose will depend on a number of factors, including how much money you need to borrow, the interest rate, and your ability to repay the loan.
For example, if you are getting a large loan and you think paying it over a year would be hard, then look for an alternative loan type that will allow you to repay over, let’s say, 2.5 years instead.
3. Interest rates
The interest rate is another important factor to consider when choosing a business loan. The interest rate is the percentage of the loan that you will have to pay back in addition to the principal.
Interest rates can vary widely, depending on the type of loan and the lender. For example, business credit cards typically have high-interest rates, while SBA loans typically have low-interest rates.
It’s important to compare interest rates before choosing a loan type because the interest rate can have a big impact on the total cost of the loan.
4. Collateral requirement
Some lenders will require you to put up collateral, such as your home or business equipment, in order to qualify for a loan.
Lenders do this to secure themselves in case things go south. So, in case you are unable to pay back the remaining amount at any point, the lender will seize the collateral, sell it, and recover what’s owed.
If you don’t have any assets that you can use as collateral, then you might want to look for a lender that doesn’t require collateral. For example, an unsecured business line of credit is a financing option that doesn’t require you to put up any collateral.
However, keep in mind that interest rates for unsecured loans will be typically higher. This is because there is no collateral to secure the lender in case the borrower defaults, and hence a higher risk for the lender.
5. Loan fees
Interest is not the only cost you have to pay for borrowing funds. Some lenders also charge loan origination fees, prepayment penalties, and other fees.
Loan origination fees are charged by the lender for processing the loan. This fee can be a flat fee or a percentage of the total loan amount. Prepayment penalties are charges that you have to pay if you pay off your loan early.
Other fees can include late payment fees, annual fees, and check processing fees.
All these fees can accumulate and make your loan more expensive than you originally thought. So, it’s important to compare the fees charged by different lenders — and different loan types — before choosing a loan.
6. Loan amount
The amount you can borrow will depend on the lender and the type of loan. For example, microloans typically have a maximum loan amount of $50,000.
But some lenders may offer higher loan amounts for certain types of loans. For example, you may be able to get a business equipment loan for up to $100,000 or an SBA loan for up to $5 million.
That is why the loan type you choose will also depend on how much money you need to borrow.
7. Lendor’s reputation
The last factor to consider is the lender’s reputation. It’s important to choose a reputable lender because you want to be sure that you’re getting a loan from a company that you can trust.
There are many different ways to research lenders, including online reviews and word-of-mouth recommendations. Here are some red flags that you should look out for while doing your research:
- The lender doesn’t have a physical address.
- The lender seems sketchy and unprofessional.
- The lender tries to hide important details such as loan fees.
If you’re still unsure about which business loan might be the best for your unique situation, then don’t be afraid to seek the help of an expert on this matter.