Suzanne Darden of the Greater Birmingham SBDC provides some great advice in this Nerdwallet.com article. To contact Suzanne or anyone else at the Alabama SBDC Network’s Capital Access team, contact us today!
Getting a small-business loan isn’t as simple as going to your local bank anymore. With the rise of online lenders, a slew of new loan options is available. But not every small-business loan is right for every business owner.
You should approach small-business loan shopping just as you would approach car shopping — by comparing two or three different options for the best rates and terms, says Suzanne Darden, a business consultant at the Alabama Small Business Development Center.
Here are three questions to ask yourself before you get a small-business loan. When you’re ready to compare specific lenders, check out our small-business loans page, where we’ve organized online lenders by cost, the products they offer and what it takes to qualify.
1. Why do you need a small-business loan?
It’s easy to get caught up in loan offers, interest rates and even advertisements from lenders. But start by asking yourself: Why do I need a loan? Your answer will dictate the type of loan you should get and will likely fall into one of four categories:
- To start your business: If you need capital to start your business, it’ll be tough to get a small-business loan. Twenty-nine percent of small-business owners fund their businesses with personal savings, according to a 2014 report by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. If you need outside financing, you’ll have to rely on business credit cards, borrowing from friends and family, crowdfunding, personal loans or a microloan from a nonprofit lender. (Here’s how to decide between business credit cards or a Prosper loan for your startup.) If you’re starting a restaurant, check out NerdWallet’s roundup ofsmall-business loans for restaurant startups.
- To manage day-to-day expenses: If you need extra money to cover payroll, rent and other bills — especially if your business is seasonal or you have gaps between when you pay your vendors and when you get paid — you’re experiencing a cash flow gap. Uneven cash flow is a top challenge faced by small businesses, according to a 2015 study by the Federal Reserve Bank of Cleveland. (Here’s more on small-business loans to manage cash flow gaps.)
- To grow your business: If you’ve been in business several years and want to expand to a new location, add a new product or service or buy a new piece of large equipment, you’ll want a term loan. But your loan shouldn’t outlast the product or equipment you’re buying. For example, if you’re purchasing a new pizza oven that you expect to use for five years, get a loan with a term of about five years. (Here’s more on small-business loans for growing your business, buying equipment and purchasing or remodeling real estate.)
- To have a safety cushion: If you don’t need cash immediately but want to put aside money in case of an emergency, you’ll want to get a line of credit or a term loan with the lowest rate possible. Ideally, you should get a bank line of credit long before you actually need it, Darden says. That way, you won’t need to scramble for cash when an emergency strikes. Check out NerdWallet’s roundup of small-business loans for building a cash cushion.
2. What kind of small-business loan do you qualify for?
Once you pinpoint how you plan to use the money, evaluate which loans you actually qualify for and choose the option with the best rate and terms. Bank loans will cost you the least in interest, but they’re also the most difficult to qualify for. Most banks want to see that you’ve been in business for two years, have a personal credit score above 680, have collateral equal to the value of the loan and have enough cash to make monthly repayments, Darden says.
Bank loans will cost you the least in interest, but they’re also the most difficult to qualify for.
If you don’t qualify for a bank loan, consider online alternatives. Different online lenders have different minimum qualifications, but they’re generally more willing to lend than banks are. They’ll often look at your credit score, monthly revenue and how long you’ve been in business, but they’ll also look at nontraditional data, such as your social media accounts. (More on how social media can help you get a small-business loan.) You can learn which online loans you qualify for and compare your options on our small-business loans page.
3. How much can you afford to repay?
Before you sign a loan agreement, you need to look carefully at your business’s financials, especially cash flow, and evaluate how much you can reasonably afford to apply toward loan repayments each month. Some online lenders require daily or twice-monthly repayments, so factor that into the equation if that’s the case.
To comfortably repay your loan each month, your total income should be at least 1.25 times your total expenses — including your new repayment amount, Darden says. For example, if your business’s income is $10,000 a month and you have $7,000 worth of expenses including rent, payroll, inventory, etc., the most you can comfortably afford is $1,000 a month in loan repayments.
The bottom line
Not every small-business loan is right for every business. To get the loan that’s best for yours, compare your options and match your business’s needs with a loan based on how you intend to use the money, what you qualify for and how much you can afford to pay.
If you need more help, consider talking to a business consultant, Darden says. A consultant can speak objectively and help you find a loan that is best suited for your business.
Find and compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
Published on October 1, 2015 | Updated on October 2, 2015