Pros explained
- Capital to meet business needs: Use the loan for various purposes, including payroll, inventory, rent, equipment and other business-related costs.
- Maintain company ownership: With a business loan, you don’t promise a portion of your profits as you do with equity financing. You maintain full company ownership and control.
- Can build a separate credit profile for your business: Some lenders report to business credit agencies, providing a way for your company to establish a separate profile and score.
Cons explained
- Repayment costs: Debt typically has costs in the form of interest charges and/or fees, increasing overall expenses.
- Increases your business debt burden: Your business loan is reported on your balance sheet, which can affect your business’s financial stability and cash flow.
- Can impact your personal credit if you default: Many business lenders require a personal guarantee, meaning the creditor can come after your personal assets if you default on the debt. Additionally, a default might be reported on your personal credit report.
How to compare small business loans
A good business loan should help you meet your goals while being affordable. Compare three to five of the best small-business loan lenders to determine which might be the best fit for your needs.
As you compare business loans, keep these factors in mind:
Rates
Comparing business loan interest rates can be challenging because many lenders use a factor rate, which is expressed as a decimal instead of a percentage.
A factor rate is multiplied by your original loan amount to determine the total amount you repay. These rates are often used for short-term loans and revenue-based financing. Factor rates of 1.0 to 1.5 are common. They can translate into relatively high APRs, however.
Eligibility requirements
You often need to demonstrate that you’ve been in business for a set period and generate a certain amount of revenue. For example, you might have to be in business for one year and generate $10,000 in monthly revenue.
Determine whether you meet the criteria and if you might have a better chance of qualifying for one loan instead of another.
Repayment terms
Most business loans are short term, meaning you must repay them within two years. Some lines of credit require repayment in as little as 12 months. Compare maximum repayment terms to determine whether you might have a more flexible timeline with one lender versus another.
Funding amount
Verify that the lenders you compare can meet your capital needs. Some lenders offer as much as $1.5 million, while others might offer only $250,000.
Reports to business credit bureau
If you hope to build your business credit separate from your personal credit, you need a business credit report. A lender that reports to a business credit bureau can help you establish a credit history that can qualify you for more funding at better rates later.
How to get a small-business loan
Before you apply for a business loan, ensure you have the required information available. You’re likely to receive a quicker decision and faster funding when everything is ready to go.
- Business information: Know how long your business has been active, its annual and monthly revenue and your employer identification number. If you have a business bank account, have that information readily available.
- Bank statements: Many small-business loan lenders require at least three months of business bank statements.
- Tax return information: If you have Schedule K-1 (Form 1065) documents, have them available, along with your personal tax return.
- Personal information: As with any loan, you need your Social Security number, address, phone number and other identifying information.
If your business lender offers a phone number you can call to connect with a specialist, use it to determine the additional documentation you might need.
Once you’re approved, provide your business bank account information to receive the funds and begin repaying the loan.
Alternatives to small-business loans
You don’t need to get a business loan to fund your small business or expand your offerings. If you can’t qualify for a business loan or if you’re concerned about the cost, consider these options:
- Small-business credit card: In some cases, you might be able to get a business credit card before qualifying for a loan. Consider using a business credit card for smaller purchases and recurring bills. If the credit card issuer reports to a business credit bureau, good habits might help you qualify for a business loan later.
- Crowdfunding: See if you can get people in your network to help you fund your business. By offering non-monetary incentives, such as a product, you might be able to raise enough money to take your small business to the next level.
- Friends and family: Consider whether you can borrow what you need from a friend or family member or if they’re willing to provide the capital for your business idea or expansion.
- Personal loan: In some cases, you might be able to access better terms with a personal loan. Costs might be lower, and you could have a longer repayment period with smaller monthly obligations, especially if you have good credit.
