startups

How to Know Which Type of Business Loan Is Right for You

Part of successful entrepreneurship is having capital, or rather funding.

While businesses have plenty of funding options at their disposal, it’s always a good idea to choose your loan option wisely.

From the investor funding, grant, loan, to small business loans, how do you know which is the right funding option for you?

In the article below, we shall look at how to know the right funding loan for your needs.

Purpose

Before applying for a business loan, you need to determine exactly why you need one.

How will the loan help your business grow, or rather what specifically use the money on?

The purpose of a loan helps you narrow down to the exact type of loan you need.

For instance, if you improve cash flow in your business, a line of credit might be an ideal financing option.

On the other hand, if you need a commercial real estate loan.

While some of the business needs, such as purchasing inventory or even paying for marketing campaigns can be addressed by several types of loans, it should help you at least to get closer to narrowing your funding options.

However, remember some reasons for funding better than others.

If getting a loan helps with the expansion of your business, then that’s a great venture. However, if you’re getting a loan to help your business avoid going underwater, then you should think twice about borrowing.

How Much Do You Need

Once you’ve decided on the purpose of your loan, the next step is to decide how much you need.

Now, small business loans come in sizes, from hundreds of dollars to millions.

So, you need to decide on the exact size you need.

Despite what you think, it’s not as much money as you need.

Though this sounds like a no brainer, remember you’re going to repay the amount you borrow, so you need to choose a loan size that you can comfortably repay without affecting the running of your business, such as cashflow.

At the same time, however, you should ensure you don’t get a too-small loan as it may restrict what you intended to complete.

The last thing you want is getting stuck in the middle of your project because you ran out of funds.

Ideally, choose a loan that is large enough to cover your expenses, yet remaining small enough to stay manageable.

Self-Awareness

The third step is to take an honest look at your creditworthiness.

While at this stage, you have an idea of the amount you need, it’s time to get real on the amount of loan you can actually get.

Now, just because you need a $40,000, it doesn’t mean your lender will approve the amount.

Instead, you’ll have to meet certain loan requirements.

Your credit check, will, for instance, determine whether you qualify for a loan.

Alongside the credit score, other factors that might determine your suitability for loan approval are the age of your business, collateral, industry, cash flow, and more.

Consider Interest Rate

Once you are eligible for a loan, you might want to consider the interest rates, though it should be used as the only determining factor.

For instance, if you’re eligible for a $100,000 loan with repayment of five years, a difference of one or two doesn’t make a huge difference.

However, the same difference can be quite significant in a $1M loan spread over 20 years.

So, before selecting a loan, you need to be smart and give more weight to a loan with higher terms.

Repayment Terms

Of course, a loan will have to be repaid, and so, you need to consider the repayment terms.

Consider the repayment time, how the schedule looks like, and whether it’s possible to clear the loan early or have to wait until its maturity.

While they might seem trivial, these elements can either save or cost you big time.

Take your Time

Now, while it’s possible to feel like time is against you, it’s okay to slow down.

The worst thing to do is selecting a loan prematurely, and so you need to be careful in your selection.

And if you’re a new entrepreneurs, the good news is that startup loans are available, but read carefully what Finimpact wrote here, you need to be patient before you make your next move.

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.