Small businesses now have an easier time getting financing than they ever did in the past. This is in large part due to the array of alternative lending options—such as Funding Circle—that are now available . While this has helped to make loans more available, it has also made it a little more difficult for small business owners to figure out which lending option is right for their needs.
Finding the right loan should be a high priority when a business needs to borrow. Different lending products have different costs, and some are designed to meet different financial needs. If you select the wrong type of loan, it could increase the costs you pay, or you might take a loan that does not work well for your business needs.
If you’re getting ready to take out a business loan, the following questions can help you determine the type of lending product that will work best for your business.
IS IT A SHORT-TERM OR LONG-TERM NEED?
It’s good to start with how long you will need the funding because this can help you to determine whether you need a long-term or short-term loan. If you know you need more time to pay the loan back, you would want to go with a long-term loan; if you just need the money for a few months, you would be better off going with a short-term loan.
It’s important to note that short-term loans usually have a higher interest rate. However, this is still the better option when your financing needs are short-term. Even with the lower interest rate, long-term loans usually cost more to service because the interest accrues over the longer life of the loan.
HOW MUCH MONEY DO YOU NEED?
Many business owners try to borrow as much as they can. Instead, you should have a set amount you are looking to borrow. Figure out how much you need to meet your needs and don’t borrow beyond that amount. Every dollar must be paid back with interest, so if you borrow more than you need, you are increasing the cost of the loan.
Knowing how much you need can also help you find the right lending product. If the amount is high, going to a bank might be the best option. That said, if you need a small loan, banks might not be interested in lending to you. For smaller loans, you might be better off looking into microloans or finding some other alternative lending solution.
WHAT IS THE STATE OF YOUR CREDIT PROFILE?
Having a perfect credit profile may not guarantee you the pick of whichever loan you may want, but it is important. Lenders are going to consider your business credit profile and your personal credit score, and both can help to determine which financing options will be available.
Before applying for a loan, you should run a credit check on your business and check your personal credit score. If you haven’t been working to maintain your credit score, you should start. Your credit score is an important factor when it comes to the cost and availability of loans.
CAN YOU WAIT FOR THE FUNDS?
Getting a loan from a bank takes time. You have to fill out applications, go to meetings, and wait for approval. In many cases, this might not be an issue. However, if your funding needs are urgent, you might not have time to wait for a bank.
Fortunately, there are alternative lenders that specialize in loans that require a quick approval process. They usually charge more, but if you need the money fast, it might be worth the extra cost.
These questions will help you to assess your needs and find the right lending option. Once you understand your needs, try to find several lenders that meet your requirements and then compare the loans they offer.
About the Author
Rae Steinbach is a freelance editor for Funding Circle.