Best Small Business Loans & How to Qualify for Them
Getting the best small business loan for
Getting a small business loan can be critical to the economic growth of a company, but financing remains elusive for more than a quarter of small U.S. firms–National Small Business Association
Business Loans Best for Small Business
The best type for your small business depends on the age of your business, your profitability & trends, and how you plan to use the money. We cover a lot of these topics in our blog post “How to Avoid Looking Stupid When Talking to Banks”. So, we won’t go into as much detail here.
Lines of Credit – Best Loan for Small Business Working Capital
In simple terms, a line of credit is very much like a credit card. A bank agrees to lend you up to a certain amount, at a certain interest rate. You do not get a lump sum of cash, and only pay interest on the outstanding balance. Aside from a slightly lower interest rate, it operates almost identically to a business credit card.
Loans – Best Loan for Small Business Capital Purchases
There are two common types of loans. First, the traditional term loan is when you borrow a fixed amount and pay it off over a fixed period, at a fixed interest rate. These are generally used for purchases of large ticket items, like equipment, for instance. Second, the short-term loan is when you need to borrow a relatively small amount of money to cover a short-term need.
For example, a seasonal business that needs to purchase goods prior to the start of their busy period. The difference between the two is the term loan term is in years, while the short-term is in months. For term loans, the SBA loan is the go-to choice. We speak to this at length in our post “How to Avoid Looking Stupid When Talking to Banks”
These are very similar to short-term loans, but in this case, there is some bill (invoice), which is used as collateral. For example, a service business who has to pay its service providers before they are paid by their clients. Alternatively, a manufacturer who has to pay for the production of its goods before the retailer pays them. If you have a business that is functioning optimally, you should be able to cover these gaps on your own. They should be used sparingly. Their overuse can signal a struggling business.
Merchant cash advances
For completeness, I am putting them here. But, they should be avoided at all costs. They are akin to payday loans. They offer predatory rates for quick cash. These exist, but I do not recommend them.
Where to get the Best Small Business Loans
Generally, the best place to get a small business loan is a bank or banking service provider like a Lending Tree, for instance. Credit unions are another great source for loans, but they tend to be more risk-averse. They do offer more competitive rates, so they are worth exploring. Finally, there are alternative loan providers.
Alternative loan providers are generally peer-to-peer or direct lenders. They generally operate online. Their applications are easier, eligibility requirements are more forgiving, and you get the money fast. However, you pay for this flexibility and speed with higher interest rates. They usually come with some personal guarantee, so some of your personal assets may be at risk.
How to Qualify for the Best Small Business Loan
We’ve covered this topic in a number of posts: “How to Take the Pain Out of Getting a Loan”, “How to Avoid Looking Stupid When Talking to Banks”, “Small Business Lending is Booming”. So, we won’t go into all the details here.
Know how much you need and where you’ll spend it. Be Realistic.
No one is going to write you a blank check. In “How to Avoid Looking Stupid When Talking to Banks”, we go into this topic in detail.
Clean-up your personal credit
If you have a credit score lower than 700, your options are limited. We discuss this in detail in “3 Key Hacks to Getting a Small Business Loan”, “How to Avoid Looking Stupid When Talking to Banks”, “Small Business Lending is Booming”.
Have a solid business plan
This supports the first point. We explain how to do that in “4 Simple Steps to Write a Successful Business Plan” and “5 Steps to Take When Analyzing Your Business”. The business plan is how you sell your idea to the lender. Plus, it’s how you support your use of funds.
Be informed & look for the right match
Making sure you are asking for the right product from the right lender is key. We discuss this in “How to Avoid Looking Stupid When Talking to Banks”.
In summary, to find the best small business loans, and to ensure that you can qualify for them, you need to do your homework. Following the steps provided should make things easier. Also, there are great free and paid services that can help you through this process as it is time-consuming and cumbersome.