How to Pick an Online Lender for a Small Business Loan

3. Decide Which Type of Loan Best Suits Your Needs

Based on your ideal loan amount, credit score, and the reason you need funding, some of the below loan types will likely work for you.

  1. Small Business Administration (SBA) loans. The SBA, a federal government agency, backs these loans to minimize risk to lenders. Although this government backing introduces lots of paperwork, the minimal risk lets lenders offer these loans at competitive rates. You can apply online for the below three types of SBA loans if you have good credit.
  2. 7(a) loans. These loans are the “gold standard” for small business lending. Their long repayment terms lower your monthly payments, and their interest rates are low and variable. These loans are also fully amortized, so you pay less interest on them as time goes on. You can use an SBA 7(a) loan to obtain working capital, purchase commercial property, or refinance your debts.
  3. 504 loans. If your goals for buying commercial real estate overlap with that of your local Community Development Corporation (CDC), you may qualify for an SBA 504 loan. Your CDC will cover 40% of your loan’s value, and the SBA will cover 50%. Long terms of 10, 15, or 25 years are common for repaying these loans.
  4. Microloans. Very small businesses are eligible for these loans, which are at most $50,000. You can use a microloan to buy furniture, fixtures, inventory, supplies, working capital, machinery, or equipment.
  5. Bank term loans. Good credit is also a requirement for bank term loans, but these loans are otherwise easier and faster to qualify for than SBA loans. They can also help you strengthen your credit history since their interest payments are fixed, so consistently paying them on time shows creditors that you’re trustworthy. Beware, though, that their repayment terms typically span one to five years, so their monthly payments are larger.
  6. Business lines of credit. A business line of credit offers you a certain amount of funding and expires once you use all your funds. You don’t have to use the entire amount, and you’ll only pay interest on the portion of the funds you actually borrow. Small business owners often use business credit lines to cover payroll, marketing, inventory, and equipment costs, though their interest rates can be high.
  7. Equipment financing. An equipment loan is mostly like any other loan. One key difference is that the equipment you buy with the loan is your collateral, meaning it can be seized if you default. With other loans, your personal or business assets may be collateral. Additionally, at the end of an equipment loan term, you can buy the equipment.
  8. Merchant cash advances. You can likely obtain merchant cash advances (MCAs) if you process a high volume of credit card transactions per day. Often, MCAs are available to borrowers with bad credit, making them a great option if you don’t qualify for traditional loans. They’re easy to repay, too: The lender will automatically withdraw a portion of your daily credit card revenue. That said, MCA interest rates and fees can be extremely high.
  9. Invoice factoring. If many of your incoming client payments are held up in accounts receivable, invoice factoring can help restore your cash flow. Invoice factoring companies buy unpaid invoices from you and take a fee to collect the payment from your clients. You’ll pay a weekly fee to the factoring company as they work to collect your invoices, but this fee is often partially refundable.

4. Research and Compare Lenders

Your possible loan types and amounts should give you most of what you need to properly look at and compare potential lenders. Consider a few different lenders for each loan type for which you qualify, then see which lenders and loans best fit your needs and budget.

For example, maybe an online alternative lender would get you funds tomorrow. But when you look closely at the terms and conditions, you might see that you’d pay extremely high interest rates. You might also notice that your monthly payments would be high since your repayment term is short. When you look at SBA 7(a) loans instead, you’ll see low rates, small monthly payments, and interest that decreases over time. That choice might be better if you qualify.

5. Apply for a Loan

Once you’ve found the right loan for your business, apply for it. You might find that several loans work well for your business, but you should only apply for one. There’s no reason to put yourself in a position to take out three loans when only one will do the trick. Plus, applying for just one loan can save you lots of work – even though online loan applications are easier than ever.

Finding Your Funding

The above tips should help persuade you to choose online lenders over traditional banks and show you how to identify the right lender. They should also convince you that SBA 7(a) loans are the best option if you qualify. And if you do, SmartBiz® can help connect you with approved lenders to get the capital you need. Just create a SmartBiz account to begin the process.

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