A Guide to Choosing the Right Small Business Loan

Before jumping into the details on the types of loans offered and what loan makes the most sense for your business, take time to assess your current needs. Here are some good initial questions to answer so you have clear goals set before you start your research.

1. How much money do you need?
2. What do you need the money for?
3. How long will it take you to pay it back?
4. How long have you been in business?
5. What is the current financial shape of your business?
6. How much collateral, if any, do you have to put up for the loan?
7. What’s your credit score?
8. Do you have any other outstanding loans?
9. Are you looking for a short or long-term loan?

Once you’ve answered these questions, it’s best to consider the several different types of loans and decide which is best for your business. From there, you can learn about which lenders offer which types of loans and apply to the best company. Here’s a breakdown about what you need to know about each type of lender.

Types of lenders

Small Business Administration loans

The Small Business Administration offers several loan programs designed to meet the financing needs of a range of business types. With these loans, the government isn’t directly lending small businesses money. Instead, the SBA sets guidelines for loans made by its partners, which include banks, community development organizations and micro lending institutions. The SBA reduces the risk to lenders by guaranteeing the loans will be repaid. Businesses have a variety of SBA loan types to choose from, each of which comes with its own parameters and stipulations on how the money can be used and when it must be repaid.

Pros and cons: The government guarantee, which typically covers 75 to 90 percent of the loan, eliminates much of the risk for the lender. SBA loan terms also tend to be more favorable to borrowers. The downsides are that additional paperwork needs to be filed, extra fees need to be paid, and it takes longer to get approved. You may also have to meet stricter requirements to qualify for a loan from a traditional SBA lender.

Conventional bank loans

Pros and Cons: The biggest pluses of conventional bank loans are that they carry low interest rates and, because a federal agency is not involved, the approval process can be faster. However, these types of loans typically include shorter repayment times than SBA loans and often include balloon payments.  Additionally, it’s often difficult to get approved for a conventional bank loan. Traditional banks approved only 23 percent of funding requests in March of 2016, which was considered a new high. Compared to the near 61 percent approval rating of alternative lenders in the same timeframe, it still seems low.

Alternative lenders

Alternative lenders are particularly attractive to small businesses that don’t have a stellar financial history, because approval requirements aren’t as stringent. Alternative lenders typically offer online applications, make approval decisions in a matter of hours and provide funding in less than five days. There are direct alternative lenders that lend money directly to small businesses and lending marketplaces, which provide small businesses with multiple loan options from different direct lenders. Examples of direct alternative lenders are Kabbage, OnDeck Capital, and SBG Funding. Lending marketplaces include Bizfi and Biz2Credit.

Pros and cons: The positives of working with an alternative lender are that your business doesn’t need to have a stellar financial history; there are few restrictions on what you can use the money for, and the loans can be approved almost instantly. The downside is that interest rates can be significantly higher than those charged by a bank. Because of the nature of the loan, it’s important to pore over the fine print and ensure you’re entering into an agreement that makes sense financially for your business.