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Small business owners are often confused about the right loan their business needs.
If you need a loan for your small business, you might be tempted to take the first offer you get.
But you might only need some small business loans. If you don’t think carefully about what kind of loan your business needs, you could slow down your cash flow or leave thousands of dollars on the table. Or, even worse, you might need help to solve the problem for which you took out the loan in the first place.
Refrain from falling into this trap by not considering what you need from that business loan. There are many things to think about, but you can figure out what your business needs from a lender by asking yourself these 5 questions.
Five steps to know the loan that works best for you
- What amount of money do you need?
You want a business loan because you need money you don’t have. You should know how much money you want, though. It’s important to be flexible and realistic with the range you ask for since a lender will see it as a sign of how well you understand your business’s finances and growth potential.
A loan offer that isn’t enough to help you isn’t worth taking, of course… Unless you could use that money differently to solve your problem or pay for something else.
But an offer for a too-big loan could also be a problem. The more you borrow, the more you have to pay back, and if you don’t have a way to turn that extra money into more money in the future, you’ll end up paying more interest than you want or need to.
When you look at different loan offers, you should choose the one with the right amount. Be smart about how much you want to borrow, and consider how you could spend what you’re given.
Most people compare loans by looking at the interest rates to see which one costs more.
Even though it’s important to know how much that money will cost, you shouldn’t just look at the loan’s interest rate. Instead, it would help if you also asked the lender for the APR, which stands for annual percentage rate. This number includes costs like origination and processing fees, giving you a better idea of how much the loan will cost.
Also, remember to ask if your loan has a fee for paying it off early or any other extra costs. The more you know about the costs of your options, the better you can figure out if your business can afford the loans you’re thinking about.
Some loans can be paid back in 6 months, while others can take up to 10 years.
Know which one you like best?
A loan with payments spread out over several years might sound scary. After all, that’s a long time to be making payments. But in general, longer-term loans have larger amounts and lower interest rates, and they are usually only given to business owners who have done well in the past.
Repayment schedules also tend to be different for loans with different terms. The shorter your loan term, the more often you’ll make smaller payments. You’ll make larger payments more often if your loan term is longer.
- How soon do you need cash?
In general, fast cash is expensive cash when it comes to financing a business.
In other words, the faster you need the money, the more it will cost. If lenders can’t take their time with underwriting, they will have to raise their rates to compensate for possible losses.
If you need a business loan right away to deal with an emergency or take advantage of a deal that won’t last long, you can expect to pay more. But, if you are willing to wait weeks or even months to get a loan, you might get a much cheaper one.
If you need the money now, you need it now, but keep in mind that you can save money if you’re willing and able to be more patient with the loan application process.
Last but not least, there are many different kinds of loans. Make sure that yours is the one that will help you the most.
First, do you need a fixed-term loan or a revolving line of credit? A line of credit or a business credit card could be just what you need if you need help paying for recurring expenses or want a cash cushion in an emergency.
But if you need money for a one-time purchase, you might be better off with a term loan. But if you want to buy equipment or stock, you can finance those purchases instead. You could also finance your invoices if you need a loan to make up for customers who pay late.
There are many different ways to get money for your small business, so look into them to find the best one.
What You Need to Know to Choose the Right Loan
Everyone’s situation is different, so before you decide on a loan for your small business, make sure you know everything about it. It might sound great to get a loan for a lot of money with a low-interest rate, but if you can’t qualify or need the money right away, there are better loans for you.
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Once you’ve answered these questions and have a good idea of what your business needs financially, all you have to do to find the best business loan is to match your needs as best you can with the loans you can get. Best of luck!