Choosing your business loan
So you have plenty of choices for your business loan—but what kind should you actually get?
Well, you’ll have to figure that out for yourself. Luckily, we’re here to guide you. Here’s a step-by-step process for finding the right loan for your needs.
Step 1: Nail down why you need a loan
First, you need to decide exactly why you need a loan. How will a loan help your business grow? What specifically will you use the money on?
Your answers will narrow down the type of loan you need. If you need financing to improve cash flow, for example, you might decide on a line of credit. Or if you want to purchase a new building, you’ll definitely want a commercial real estate loan.
Your answers will narrow down the type of loan you need. If you need financing to improve cash flow, for example, you might decide on a line of credit. Or if you want to purchase a new building, you’ll definitely want a commercial real estate loan.
Some uses—like paying for marketing campaigns or purchasing inventory—may apply to many types of loans. But with this first step, you should be able to get at least a little closer to narrowing down your options.
Before we go on, though, some real talk: keep in mind that some reasons for getting a loan are better than others. If getting a loan will help you expand your business and increase your profit, that’s a pretty good reason. But if you’re getting a loan as a last-ditch measure to keep your business from going underwater, you should think twice about borrowing.
Do you really need a loan, or do you need to reevaluate your business’s spending and budget? Will a loan actually help your business recover and thrive, or will it be like putting on a Band-Aid when you’re bleeding out? The last thing you want to do is incur debt you can’t pay off.
So borrow wisely.
Your answers will narrow down the type of loan you need. If you need financing to improve cash flow, for example, you might decide on a line of credit. Or if you want to purchase a new building, you’ll definitely want a commercial real estate loan.
Some uses—like paying for marketing campaigns or purchasing inventory—may apply to many types of loans. But with this first step, you should be able to get at least a little closer to narrowing down your options.
Before we go on, though, some real talk: keep in mind that some reasons for getting a loan are better than others. If getting a loan will help you expand your business and increase your profit, that’s a pretty good reason. But if you’re getting a loan as a last-ditch measure to keep your business from going underwater, you should think twice about borrowing.
Do you really need a loan, or do you need to reevaluate your business’s spending and budget? Will a loan actually help your business recover and thrive, or will it be like putting on a Band-Aid when you’re bleeding out? The last thing you want to do is incur debt you can’t pay off.
So borrow wisely.
Funding options
Remember: loans are just one of several
small-business funding options. Don’t forget to consider other types of financing, like grants, crowdfunding, and investors.
Step 2: Figure out how much you need
Small-business loans come in lots of sizes—from hundreds of dollars to millions—so you’ll need to decide just what size you need. And despite what you might think, the answer is not “as much money as I can possibly get.”
It might sound obvious, but you’ll have to repay whatever you borrow. And a larger loan will likely mean bigger payments, which can hurt your cash flow. Plus, most lenders calculate interest and other fees as a percentage of your loan amount. A big loan will come with higher fees. So if you borrow money you don’t need, you’ll end up paying for that excess amount.
At the same time, you should make sure you don’t get a too-small loan. The last thing you want is to come up short on cash in the middle of a renovation project, for example.
Getting the wrong size loan is one of the most common mistakes business owners make when applying for funding. So try to find the right balance: large enough to cover your expenses, but small enough to stay manageable.
Pro tip
Many lenders take origination fees and other up-front fees out of your initial loan amount. So if you actually need $50,000, for example, you might want to get a slightly larger loan—say $55,000—to account for the cost of those fees.
Step 3: Take an honest look at your creditworthiness
By this point, you should have a rough idea of what kind of loan you want, but now you need to get real about what kind of loan you can actually get. Just because you want a $500,000 term loan doesn’t mean a lender wants to give you one, after all. You’ll have to meet certain business loan requirements.
Lenders will consider many factors as they evaluate your creditworthiness. For example, they might ask questions like these:
- What’s your personal credit score?
- How’s your business credit?
- What’s your annual revenue?
- How long have you been in business?
- Have you ever declared bankruptcy?
A traditional lender will likely want a pretty specific set of answers to these questions (think: 780; perfect; $200,000; five years; and no), whereas alternative lenders will have varying requirements.
Likewise, your creditworthiness will affect what kind of loan you get from a lender. While many lenders would hesitate to give a five-year loan to business owners with bad credit and a history of bankruptcies, for example, they might be more willing to extend a merchant cash advance.
Step 4: Explore your lending options
Now that you know what you need from a loan and what kinds of lenders you might qualify for, you can start looking specifically at lenders and their loan offerings.
So if you know you want invoice financing, you can start comparing lenders who offer that. Or if you know you have good enough credit to qualify for a traditional financial institution, you can begin comparing bank loan options.
As you compare, look at key small-business loan features like minimum and maximum loan amounts, terms, fees, and APRs.
In many cases, you won’t find one “best” loan—one might have a higher APR but also a better term, while another might have a lower APR but higher up-front fees—so you’ll have to decide what’s most important in your situation. Do you need low monthly payments? A big loan amount? A long term? That’s up to you to decide.
Once you prioritize your needs, you can decide on a lender and a loan. Then all that’s left is to submit a loan application. Make sure you gather any relevant documents (such as tax returns, bank statements, articles of organization, etc.) to speed up the process.
If you get accepted, then it’s time to use your newfound funding to build your business. Congratulations!
If you get denied, don’t give up; there’s plenty of fish in the sea. Or in this case, plenty of loans in the world. You can always apply somewhere else or choose a different type of loan.