Know How to Choose the Best Business Loan
Sep 06, 2021
Whether you own a startup looking for investors or are a medium-scale business person searching for funds, finding the best load for your business is crucial. Today, there are a lot of options when it comes to getting an instant business loan.
We can now get online and offline loans in no time. However, it is critical to understand the parameters of granting these loans. One might consider checking an online business loan EMI calculator, going to the money lending organisations, or asking their friends.
The first step in any loan application process includes comparing the opportunities and limitations. Carefully understanding all these aspects before taking a loan will always help avoid problems. Moreover, with many institutions offering many different kinds of loans, it can become challenging to select the appropriate one.
Steps to Choose a Business Loan
Before you go ahead and choose a business loan, some roadblocks are also defined as the steps of business loans. You need to understand these steps and then start the application process.
Understand and Define Your Requirement for Capital
The first step to apply for business loans is to understand and define your capital requirement. Each loan that we have listed above has different norms and fund amounts. Though other things need to be considered, these two factors are of utmost concern. Until you define everything on paper, you won’t be able to apply for the loan, and this could lead to unnecessary paperwork, rejections, and trouble.
Develop a Model and Get Your Loan and EMI Calculations Right
An online business loan EMI calculator helps in knowing how much interest you will have to pay for your loan. It is also very crucial from your point of view. So, develop a model and select the loan type that suits your business the most. The step will also give you a clear picture of how much money you will need.
Make Sure You Fulfil the Basic Eligibility Criteria
Every loan type is different; they have different uses and serve different purposes. If you are applying for any loan, ensure that you fulfil the business loan eligibility criteria. Getting an online business loan is not a cakewalk. From completing the paperwork to passing multiple criteria, you will have to ascertain that every document and the required items are present before you start filling the form.
Choose a Lending Partner Who Resonates With Your Business
There are different loans that various lending partners excel in. If you are looking for small business loans, it is better to check lenders who are the best in that segment. It is not always the case that you’ll get the best deal with banks or other financial institutions. So, do your homework before you start filling your forms to a lending partner, and ensure to check for other options. Then, compare and select the best one amongst them.
Different Types of Business Loans
A brilliant idea is the first stepping stone in becoming a successful entrepreneur. However, the next step to turning that idea into reality is funding it. Several different kinds of loans are available in the market, and the common ones are listed below.
7(a) Loan Programme
Termed as one of the best small business loans, a 7(a) loan programme is by far one of the most popular and basic loans. The loan programme is used in multiple ways, including property purchase, working capital, and expansion or acquiring the refinance debts. It is one of the best types of small business loans. However, to access this loan programme, you need to understand its merits and demerits.
Merits of 7(a) Loan Programme
- The loan receivers get a long period to repay the loan (up to 10 years)
- Such loans never ask for collateral
- The interest rates of these programmes are lesser than average
Demerits of 7(a) Loan Programme
- You have to undergo a cumbersome process to qualify for this programme
- It requires a few specific documents
- It asks for a personal guarantee
An excellent option for SME business loans and startups, a microloan programme lends small amounts. Mostly, these amounts are borrowed by people for expanding their business, acquiring others, and as working capital. The key difference between 7(a) and microloan programmes is that the latter lends a small amount and the repayment time is lesser. Here are the merits and demerits of this programme.
Merits of Microloan Programme
- The distribution is quick
- It lends the money to businesses, but not in the manner of a traditional lender
- It can be used to cover a lot of business components, such as working capital, inventory, and machinery
Demerits of Microloan Programme
- The borrower has to go through two layers of bureaucracy: the bank and the government
- You can’t buy anything in real estate or pay off debts through microloans
Whether you have an online or an offline business, disasters can ravage your business at any point. If you encounter something like that, a disaster loan is the best option for your business to recover. In this loan, you get a substantial amount based on your business strength, annual turnover, and other aspects. Here are a few things to consider before you apply for business loans.
Merits of Disaster Loans
- The amount given is higher than the normal loan amount
- The terms are lenient in this loan
- You also get a longer repayment period, which can be up to 30 years
- The funds can be used as per the need and flexibly
Demerits of Disaster Loans
- The qualification for this loan is highly challenging
- The loan amount will depend on various financial options
Equipment Loan Financing
A traditional business loan, equipment loan financing is perfect for small businesses. It is a specific loan for several different things, such as buying new pieces of machinery for your office, procuring equipment for your employees, and improving your workplace. You can also use this amount for EMIs or payment for other items. Here are some crucial things about this loan you should know before applying.
Merits of Equipment Loan Financing
- The loan type offers flexible terms to the applicant
- It comes under the category of fast funding
- You will not be asked to provide any additional collateral by the loan provider
Demerits of Equipment Loan Financing
- It is only for equipment
- You cannot use this money for leasing; you will have to buy equipment using this money
- The interest rate is higher than the average
Line of Credit
If the nature of your business is very unpredictable, a line of credit loan will be the best option for you. If you are running a company where you need money only sometimes, opt for a line of credit. It is an option where your money remains available until you need it. Here are some critical things that you should know.
Merits of Line of Credit
- You will have to pay for only what you use
- It helps in balancing your cash flow when there is a crunch
- Line of credit encourages flexibility in terms of funds and their usage
- It also helps in boosting the credit score of a business
Demerits of Line of Credit
- There are strict requirements that need to be adhered to
- There are multiple steps under strict requirements
- It also limits the power of borrowing
Working Capital Loan
Small businesses are prone to huge losses and repeated mistakes. It is the reason why positive cash flow takes a hit at crunch times. That’s when a working capital loan is appropriate. The cyclical nature of SMEs steers the working capital loan to be the best bet. It is a short-term business loan that enables the business owner to get cash for their company till they find other ways to earn revenues.
Merits of Working Capital Loan
- It is the best loan type, offering cash in hand
- There are only a few spending restrictions
- You won’t have to put up any collateral if your business has good credit
Demerits of Working Capital Loan
- The interest rates are higher than the average
- You will have to repay the loan quickly
Business Credit Cards
One of the most prominent ways to get a loan from authentic money providers is through business credit cards. If you don’t need a massive sum of money, and a supporting fund is all that you need, business credit cards are considered one of the best small business loans. However, just like a personal credit card, it also has to be used with utmost caution and discipline. If not, the costs can get out of hand in no time.
Merits of Business Credit Cards
- It has a simple and easy qualification
- You also get the rewards and perks of using a business credit card
- You only have to pay for the sum you use
Demerits of Business Credit Cards
- It has high interest rates
- The purchasing protection is very limited
- There are chances of fraud and security issues
You may have heard about angel investors and fundraisers. All these are ways to provide a much-needed base for your business. Take it this way: When you get a business loan from an institution or any loan department, you are provided with a chance to invest in your idea. It means the loan works as a growth provider to your business. So, if it is of so much value, it becomes your duty to select the right financial product for your business. Also, the right loan helps in the growth of the business exponentially.