7 Tips for Choosing the Right Small Business Financing Option

Choosing a financing option is typically one of the most important decisions you’ll make for your business. Choosing the wrong loan with the wrong terms may have serious consequences. But choosing the right loan may be able to help you achieve things that otherwise wouldn’t be possible.

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With such an important decision, how do you know where to start? How can you ensure you make an educated decision when there’s so much involved?

The good news is it’s easier than ever to learn about small business financing options. To get started, there are generally some practical actions you may be able to take right now that will help you confidently make a decision.

The following seven tips may help you clarify what you need to better analyze and compare different types of small business loans.

1. Be specific about the what, why, and how

Know what you need. When it comes to determining the amount of money you need, you want to aim to be specific. Otherwise, you risk borrowing more money than necessary and paying more in interest as a result. On the other hand, if you take out too little, you may need to take out another loan to make up the difference, which may cost you both time and money.

Know why you need it. You need to know how you’re going to use the funds. When it comes time to research and compare your options, knowing why you need the money will help you make a more informed decision.

Know how it will benefit your business. Take the extra step of thinking through how the money will benefit your business. For example, if you need a piece of equipment, determine the impact it will have on your business. Will it help you increase efficiency and therefore the volume of your sales? Will it help reduce labor costs? Getting specific about how the loan will benefit your business will help provide a boost of confidence to business owners who are risk-averse in knowing that the loan of their choice is the right one. For business owners who are more comfortable with risk, this exercise may provide a more realistic picture of what’s needed and help avoid rushing into a loan that isn’t the right fit.

2. Know what it takes to qualify and where you stand

If a lender is going to approve you for a loan, they’re typically going to want assurance that you can repay them. Lenders may vary in how they determine your eligibility, but there are generally some common factors that business owners can use to help get a general idea of how likely they are to qualify.

Common business loan qualification criteria include:

  • Your credit score
  • How long you’ve been in business
  • Your current debt load
  • What collateral you have available
  • The industry you’re in
  • How much revenue you generate

Assess how you’re doing in these areas and do some research to learn how they may impact your eligibility. This is especially important for businesses seeking their first small business loan as they typically don’t have the credit or trust built up from paying back a previous loan.

This step is often crucial because it may help you identify any areas needing improvement and the strengths you have that you may be able to highlight and provide sufficient documentation for in your application.

You may also learn more about the common reasons lenders reject loan applications to help you get a better idea of your potential eligibility.

3. Take your time to research small business financing options

While you might feel pressure to make a quick decision, try not to fall into that trap. Your goal is to make a smart, educated decision — not an emotional one.

Set some time aside to research the different financing options available to small business owners. Don’t forget to use Google® to your advantage for this! Rather than having to take time out of your day to go to several banks and learn about what they offer, you may consider doing research online on your own to learn about the different loan types and lenders.

To get you started, here’s a quick snapshot of some common small business financing options.

  • SBA loans: SBA loans are backed by the Small Business Administration (SBA) and typically have favorable rates, longer repayment terms, and lower monthly payments. Learn more about SBA loans and how to get one for your business.
  • Bank term loans: These typically allow business owners quicker access to funding and can help boost their credit score when paid back on time and in full. Learn about the pros and cons of short- and long-term loans for small businesses.
  • Alternative financing options: Some alternative financing options include business lines of credit, merchant cash advances (MCAs), invoice factoring, and equipment financing. These typically work great for businesses that need funding, but are still working on building their credit. Learn more about alternative financing options for small businesses.

4. Know what matters when comparing your options

Once you’ve narrowed your list down to a few options, the final decision generally comes down to knowing what matters to you.

Here are some considerations to help you make the right choice when comparing your final options:

  • Do you need a low monthly payment?
  • How fast do you need the funds?
  • How do the interest rates and repayment terms compare?
  • Are there restrictions on how the funds can be used?

Some of these things might be more straightforward than others. For example, if you’re looking at two different lenders for the same loan and one has a better interest rate, that may be a better option.

But some things may be more subjective. Maybe you can afford a high monthly payment, but you’d prefer to have a lower burden every month to give you more room in your monthly cash flow. Though you can afford a loan with a shorter repayment term and that costs less overall, you may still decide to go with a longer-term loan with a lower monthly payment.

There may not be a right or wrong answer and, in that instance, you need to ask yourself what matters most to you and decide what you’re most comfortable with.

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5. Use the financial resources available to you

Having a financial professional weigh in on your situation and offer guidance is typically a smart decision. If you don’t already have one, learn how to hire an accountant for your small business.

You may also consider online lenders and services, such as SmartBiz®, where you are typically able to quickly find out if you pre-qualify without any impact on your credit score* and get recommendations for the financial product that best suits your current business needs and circumstances.

As a business owner, you likely have other business owners in your network! If you feel comfortable, you may also be able to reach out to them for advice. But remember to take everything with a grain of salt. What’s right for a peer’s business may not be right for yours, and vice versa. Consider what they have to say, but trust your instincts.

6. Prepare beforehand to improve your chances of approval

To improve your chances of qualification, it’s typically a good practice to avoid waiting until you start applying to find out what documentation you need. Research what you need beforehand and have everything ready to help make the process as streamlined as possible.

Some examples of documentation that lenders typically require include:

  • Business tax returns
  • Income statements
  • Balance sheets
  • Schedule of liabilities
  • Personal tax returns
  • Personal financial statements

You may also need to write a business plan. Give yourself plenty of time to do that and review it to help make your application as strong as possible.

Typically, the more prepared and thorough you are, the better your chances are of getting approved.

7. Make an educated decision with confidence

Every business owner is different. Some might be prone to make a quick decision, while others may be prone to delaying a decision by spending too much time researching.

Be diligent in your research and make sure you understand everything you need to know before making your decision.

But don’t get stuck analyzing and researching without further action. Once you’ve done the work, you may more confidently move forward knowing you’re making an educated decision that may benefit your business.

A practical next step

While there’s a lot of information and possibilities, finding the right financing option for your business may be possible!

These seven tips will help you make a smarter decision that helps you achieve your goals and grow your business.

If you’re ready to explore your loan options, SmartBiz may help you find the right small business loan tailored to your needs. Learn how to pre-qualify in 5 minutes without any impact on your credit score.*

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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