Looking to get a loan for your small business? With multiple new lenders popping up it’s important to remember that not all small business loans are created equal (or, if you’re an Orwell fan, some are more equal than others). To help guide you in your research for the loan that’s right for you, Nerdwallet recently examined three questions you should ask yourself when looking for a small business loan.
Perhaps the largest question is the first: why do you need a loan? If the answer is “to start a new business,” you may have a much harder time securing a loan than someone looking to expand an already successful operation. While it’s still possible to get the loan you need as a startup you will have more limited options available and will likely have to pay a higher interest rate than an established business would.
How you will use the funds can also factor greatly into whether what you actually wants is a lump sum loan or a revolving line of business credit. For example, if you want a loan just to have a “safety cushion,” a line of credit might be a good idea. Meanwhile a business owner who needs to make a large purchase may prefer a one-time loan.
Once you’ve figured out the type of loan you need, the next step is to figure out what loans you qualify for. Different banks and alternative lenders will have different minimum requirements for borrowers. With any luck you’ll qualify for loans from multiple lenders, allowing you to comparison shop for the best rate possible.
The final consideration to make is how much you can afford to repay on a loan at a time. The terms of a small business loan can vary greatly with some lenders requiring payments weekly while others may be monthly. Obviously a loan will be cheaper if the terms are shorter but it’s important not to put yourself in a worse financial situation by trying to pay off your loan too quickly. As a guideline for calculating what you can afford in monthly payments, Alabama Small Business Development Center business consultant Suzanne Darden suggests that your total income should be 1.25 times your expenses (including loan repayment) each month.
Today there are more options than ever for securing a small business loan. This can be a blessing but it can also be overwhelming when you’re trying to find the loan that’s right for you. Hopefully asking yourself these three important questions will help point you in the right direction.