Starting a small business can be a risky financial move and almost always comes with the need for funding. Sometimes the funding can come from investors, but as a business begins to grow, many small business owners turn to banks, credit unions or other lenders for a loan. When determining where to take out a small business loan, owners should consider the following factors to find the best loan to suit their needs.
1. The terms of the loan
Small business owners need to understand all the terms and conditions of a loan before signing the dotted line. The small business loan sector is growing rapidly, which means there are some unsavory characters looking to make a quick buck. There are also a variety of ways a lender or creditor can offer funding. Here’s what to consider:
APR or a factoring fee: Factoring could work a few ways, but typically a lender agrees to pay the business owner a percentage of an invoice with a client. The process can be quite expensive, so calculate the cost of using factoring beforehand.
Interest: Determine how much you’ll pay over the length of the loan.
The payment structure: See if it is set payments for the duration of the term, or if there is a fee or interest hike in later months.
Origination fees and prepayment penalty fees: Check how those fees factor in to the true APR of the loan.
The bottom line: Small business owners should always take the time to do the math before agreeing to take a loan.
2. How the lender determines credit worthiness
Just like with any other form of credit or loan, not all underwriting is created equal. Small business lenders will have a multitude of requirements. Some will require that you’ve been in business for two years and generate at least six-figure income. Others may only require owners be in business for six months or offer loans based on invoices instead of revenue.
Borrowers can use these criteria to determine which small business loans they’ll be eligible for early on and avoid sending in applications that will automatically be rejected.
3. How fast you need funding
The immediate need for funding can have a huge impact on which loans a small business owner can use. Same day or next day funding is an option, but this could come with a steeper APR because the borrower has less time to shop around and compare price points.
However, there are reputable lenders providing fast financing so long as the borrower is eligible. Here’s are a few:
Swift Capital provides $5,000 to $300,000 in as quickly as an hour on a term of three to 12 months. Borrowers must have been in business at least a year and have a minimum of $5,000 in monthly revenue as well as a minimum 550 credit score. The APR starts as low as 9.99 percent with an origination fee of 2.5 percent and no prepayment penalty.
OnDeck provides $5,000 to $250,000 in next-day funding with an origination fee of 2.5 percent and an APR range of 19.99 percent to 49 percent. Business owners must have been in business at least a year, have at least $100,000 in annual revenue and have a minimum credit score of 500.
BlueVine takes a unique spin and provides next-day funding based on invoices. The lender will pay up to 85 percent of an invoice amount with a standard rate fee of 1 percent per week with a minimum of three weeks. There is no origination fee and no prepayment penalty.
Kabbage offers a line of credit for six months with a minimum amount of $2,000 and maximum of $100,000. Borrowers pay 1 percent to 12 percent APR on the first two months and 1 percent per month on the remaining four months. Funding is available within a few days.
4. How much funding you need
Consider how much funding is needed, and don’t forget to factor in fees. Be sure the amount needed for a loan is within the maximum amount available with a lender; otherwise it isn’t worth applying in the first place.
5. Quality customer service
Sometimes a local bank or a reputable bank may offer the best fee, but small business owners should also consider customer service reviews. Newer entrants in the small business loan space may provide more streamlined customer service as well as a quicker response time. Test the customer service before taking out the loan.
Don’t Fear Shopping Around
It’s common for people to fear shopping around for credit because most applications result in a hard inquiry on credit reports, which will lower credit scores. Fortunately, doing all the shopping in a 30-day window typically results in the same loss of points as from one application. Credit reporting agencies understand people shop around for the best deals and won’t penalize them if it’s all done in a short time period.
Written by Erin Lowry of U.S. News & World Report
(Source: U.S. News & World Report)