Business loans are a necessary financial instrument for most companies, giving you immediate access to cash you wouldn’t be able to generate otherwise. Loans can help you invest in your business rapidly, fund the purchase of large-scale equipment, and help close difficult gaps you’ll face (especially early in your business’s development).
But with so many options to choose from and so many types of loans available, it can be hard to know what the “right” choice is for your business. How are you supposed to compare and shop for business loans in this environment?
Let’s start with some important tips:
- Find the right comparison site. There are many websites where you can compare different types of business loans from different providers. While most of these are beneficial, some are going to be more informative than others. Choose a comparison site where you get access to a wide range of different loan types and providers – and one where the information is completely up-to-date.
- Keep an open mind. Try not to have too many preconceived notions about the loan you’re going to get. If you make up your mind before shopping around, you’ll limit the options available to you – and you might miss out on a great opportunity.
- Look at multiple providers. You may have a name in mind, especially if you have connections with a loan officer or if you like the idea of having all your loans under the same umbrella. But if you decide on a provider too soon, you’ll close yourself off to some otherwise interesting options.
- Compare apples to apples. With so many loan types available, it’s hard to make direct comparisons. You’ll need to go out of your way to compare loans apples to apples as best you can. What’s the total cost of this loan? What are the pros and cons?
- Read the fine print. Comparison websites are typically great at providing high-level information about each loan, but it’s still important to read the fine print. Check out the additional details of the loans you’re reviewing before finalizing your decision.
Variables to Compare
When reviewing different loans, check out the following variables, at a minimum:
- Loan type. There are multiple types of business loans available, each with advantages and disadvantages. For example, equipment financing loans can help you buy specific pieces of equipment and typically carry low interest rates, but basic term loans can provide you with more flexibility – and often more total funds. You may also be interested in a floating line of credit, which you can tap into whenever you want.
- Term. What’s the duration of this loan? If you expect to make the money back quickly, or if you want to pay off the loan in a reasonable amount of time, a 1-year loan may be ideal. But you can sometimes find loans that last 25 years, or even longer, reducing your monthly minimum payments and affording you more time to secure revenue in your business.
- Interest rate. Obviously, you’ll need to think about the interest rate of your loan as well. Different loans have different types of interest rates, and they may compound at different intervals, but you can compare apples to apples by calculating the annual percentage rate (APR) of each loan available to you.
- Penalties and fees. Are there any additional penalties or fees you might face from this loan? Providers try to keep these to a minimum to attract more applicants, but you’re not guaranteed to have a penalty-free loan. Do your homework and make sure you understand all the variables.
- Credit and revenue requirements. Loan providers want to be assured that you’re going to pay the loan back. Accordingly, they may require that your business has a certain credit score, or that it has a minimum amount of revenue. If you’re a new business, or if you’ve had a sketchy financial past, this can be a dealbreaker; some loans simply won’t be available to you. You’ll need to shop for a loan that’s more forgiving.
- Lien requirements. Some types of loans may require a lien on your equipment or other business assets. You may even be held personally responsible for repaying the loan if the business fails (in some cases). Check these requirements carefully before proceeding with a loan.
- Cash availability. How soon will you be able to get the cash from this loan? Will you be able to make purchases right away or is it going to take time to settle?
There’s no single “right” loan for every business and determining the objectively most advantageous loan for your needs is going to be challenging no matter what. Take your time with this decision, do as much research as you can, and trust your final conclusions.