Starting a business entails elaborate planning, accomplishing numerous legal activities, and making strategic financial decisions. The first hurdle a small business owner or a seasoned entrepreneur has to overcome is to secure funding.
Unless you have the financial capacity to self-fund your business idea, the first thing you should consider is securing a loan. There are two common types of loans and each type consists of different kinds of loan programs that provide financing solutions to different situations. But how do you select the right business loan that will suit your needs and objectives?
Here are some tips for choosing the right business loan for your situation to set things in motion.
Securing funding is one of the most crucial steps in setting up a business
Knowing Your Options
There are many types of loan options you can choose from and it is extremely important to choose the right one for your business. Here are two of the common types of loans and the different funding programs within each category:
Small Business Administration Loans
- 7(a) Loan Program
- Microloan Program
- CDC/504 Loan Program
- Disaster Loans
Traditional Loans
- Equipment loan Financing
- Line of Credit
- Working Capital Loan
- Merchant Cash Advance
- Invoice Factoring
- Business Credit Cards
- Secured Loans
- Unsecured Loans
- Term Loans
- Personal loans
The number of types and variances of loans is overwhelming. Each with a specific use for a specific financial situation. Therefore, spend some time evaluating the financial needs of your business then research what type of loan is most suited for the situation.
Assess your business' financial needs
Compare Interest Rates
Interest rates on your business loan is a percentage of the principal amount you are borrowing. The average interest rate on a small-business loan is around 4-6% but interest rates vary across banks and other lenders. Compare interest rates closely as this decision has a significant long term impact on the financial aspect of your business. On top of that, also consider the costs, loan sizes, approved use of each loan, and the repayment structure. It is also worth knowing that your credit score determines if you qualify for the most competitive rates in the market.
Consider Repayment Terms
Repayment terms determine how long you have to repay your loan. This is a fixed agreement you enter with your lender. Normally, the longer the repayment period, the smaller the amount you have to shell out. However, in return for the longer repayment term, you are also looking at paying more interest.
On the other hand, large monthly repayments can deplete your cash reserves which may lead to potential loss of business but the larger your repayment every month means you pay off your loan faster. It is a very technical situation but you have to determine which one works for you.
Determine which payment terms work best for you
Knowing Application Fees
Lenders also require you to pay the application fee for processing an application. You pay a certain amount to get approved when you apply for any loan types. Application fees also vary from one lender to another depending on the type of loan. It is also important to consider application fees to minimize unexpected expenses.
Take Your Time
Starting a business can be exciting when you think about finally executing the business plan you have formulated for months. But prematurely selecting the wrong loan for your needs and objectives will have devasting impacts on your business. Evaluate all your options carefully and consider all the tips mentioned before applying. Be patient and don’t rush into things, there is a perfect loan for you that will help you jumpstart your business.