When you need a loan for your business, you may be tempted to accept the first one that comes your way. However, you need to understand that not all business loans are right for you.
The reality is that before you choose the best loan for your business, you need to be able to answer 5 different questions.
#1: How Much Money Do You Need?
The truth is that you’re only looking for a business loan because you don’t owe that kind of cash. So, you should have an idea about how much you need exactly.
Besides, it is important that you are not only realistic as well as flexible about the amount that you are asking for. After all, the lender will be able to determine if you truly understand how your business is as well as its growth potential by looking at your financials.
As a rule of thumb, you should not take a loan that is either too small or too big. After all, you don’t want to get a loan that does not solve your problem. On the other hand, you also don’t want to have bigger payments than the ones you actually can afford and need.
#2: How Much Does It Cost?
When you are comparing different loan options, it is important that you should look at different aspects and not only at the interest rate. While this is an important factor, it is not the only one, You should also ask the lender for the APR, the loan’s annual percentage rate. This will give you an idea about all the additional fees that you will need to pay aside from the loan itself.
#3: What Is The Term?
Another important factor to determine the best loan for your business is taking into consideration the term of the loan. While there are some loans that can be paid over 10 years, there are others that can only take 6 months.
While a multi-year loan may seem a bit daunting, it usually allows you to benefit from the largest amount as well as the interest rates tend to be lower. Nevertheless, this option tends to be available only to businesses that already have some proven track records.
#4: How Soon Do You Get The Money?
In what concerns business financing, the faster you need the money the more expensive it will be. However, in case you are willing to wait some weeks or months, you’ll usually get a better loan.
#5: Why Do You Need A Loan?
The last question that you need to answer is why you need the loan.
In case you need help to set up an emergency fund or if you need help for recurring expenses, then a business credit card or a line of credit may be what you need.
In case you need to make a one-time purchase, then you should probably look at a term loan. On the other hand, when you are looking to cover for late-paying customers, then you should consider financing your invoices.
The truth is that there are many different types of loans. So, you need to determine what you need the loan for and then act accordingly.