Determine your payment capacity.
- Examine your company’s financials, particularly its cash flow, and determine how much you can afford to put toward loan repayments each month.
- Some internet lenders need daily repayments, so keep that in mind.
- Darden recommends that your total income be at least 1.25 times your total costs, including your new repayment amount, in order to comfortably repay your loan each month. For example, if your company earns $10,000 per month and spends $7,000 on rent, payroll, and other expenses, you should be able to handle a $1,000 monthly loan payment. Your income ($10,000) equals 1.25 times your costs ($8,000).
Determine whether and how you will collateralize the loan.
- A secured loan necessitates the provision of business collateral, such as property or equipment, which the lender may confiscate if you fail to repay the loan.
- Putting up collateral is dangerous, but it can also increase the amount you can borrow from lenders and get you a reduced interest rate.
- Even for unsecured loans, lenders may require a personal guarantee. This implies you’ll personally repay the debt if your company can’t, and it may allow a lender to repossess your home or car in the event of nonpayment.
Small-business lenders are compared.
- Online lenders, banks, and nonprofit microlenders are the three main providers of small-business loans. Each normally has numerous items, but one may be superior in particular situations.
When to apply for a business loan from an online lender:
- You don’t have any collateral.
- You lack time in business.
- You require funding now.
Online lenders provide small-business loans and credit lines ranging from $1,000 to $5 million. The average annual percentage rate on these loans ranges from 6% to 99.9%, depending on the lender, loan type and amount, payback term duration, borrower credit history, and if collateral is necessary.
These lenders rarely provide lower APRs than traditional banks, but approval rates are greater and funding is faster — as fast as 12 hours — than with banks.
When to seek a bank loan for a business:
- You’ve had your company for at least two years.
- You have excellent credit.
- You don’t require money right away.
Term loans, lines of credit, and commercial mortgages are all traditional bank choices for purchasing or refinancing real estate.
The US Small Business Administration provides general small-business loans through banks through its 7(a) loan program, as well as short-term microloans and catastrophe loans. According to the Congressional Research Service, the SBA makes loans up to $5.5 million, with 7(a) loans average $704,581 in fiscal year 2021. The average SBA microloan is $13,000 in amount.
The SBA also has a 504 loan program that promotes community economic development by providing long-term, fixed-rate financing for businesses to purchase fixed assets such as land, buildings, or equipment.
Due to considerations such as reduced sales volume and cash reserves, obtaining a small-business loan from a bank might be difficult. Add to it bad personal credit or a lack of collateral, and many small-business owners are left holding the bag. Getting funded takes longer than alternative methods, but banks often have the lowest APR.