Size of Loan

The size of the loan that you need is one of the most important things to considering who to borrow the money from. If you can’t borrow enough to meet your needs, you’ll need to find another lender who offers larger loans.

Types of Loans

There are a few major types of loans that you can get as a small business owner:

• Inventory loans
• Balloon Loans
• Installment Loans
• Lines of Credit

Installment / Term Loans

These are the standard loans that most people are familiar with. You borrow an amount of money and make monthly payments on both the interest and principal until it has been paid off in full. You can use these loans for all sorts of things, such as expanding your business or buying equipment.

Lines of Credit

A line of credit is not exactly a loan. Instead, it is an offer to let you borrow up to a certain amount of money at any time. Once you’re approved for the line of credit, you can withdraw the cash as you need it. If you do make a withdrawal, you’ll be billed each month until you pay the loan off. If you don’t withdraw money, you won’t receive a bill.

Because of their flexibility, lines of credit are good for businesses with unpredictable cash needs.

Inventory Loans

Inventory loans are small business startup loans designed to help you build up inventory. Whether you need to buy new products to add to your inventory or build up your inventory before you open for business, this is the loan for you.

Balloon Loans

Balloon loans offer a lump sum up front, but you only have to pay interest over the life of the loan. You pay the amount of the loan in one full “balloon” payment when the loan expires. These types of loans are good for when you need money but are waiting on a large payment from a client.

Availability of SBA Loans

The Small Business Administration is a government entity that offers loans to small business owners. SBA loans can be easier to qualify for because the government will provide some security for the lender.

The SBA offers four loan programs:

1. The 7(a) Loan Guarantee Program
2. The Microloan Program
3. 504 Fixed Asset Program
4. Disaster Loan Program

The 7(a) Loan Guarantee Program

The 7(a) loan guarantee program helps small business owners start or expand their businesses. These loans can be as large as $5 million, giving you plenty of capital to get your business going.

The Microloan Program

The microloan program offers short-term loans of $50,000 or less. These are generally used to purchase inventory or office supplies.

504 Fixed Asset Program

The 504 fixed asset program offers long-term, fixed-rate loans designed to help business owners purchase equipment or real estate that will be used by the business. It is administered by non-profit Certified Development Companies across the US and targets business that will employ people or provide services in underserved areas.

Disaster Loan Program

Disaster Loans are long-term, low-interest loans to businesses in areas affected by declared disasters.

Interest Rates

Next to the size of the loan, the loan’s interest rate is the next most important thing to consider. The higher the interest on the loan, the more you’ll have to pay back over the course of the loan. Even a small difference in the interest rate can make a huge difference in the cost of a loan.

For example, if you get an SBA loan for $1,500,000 at 4% interest, with a ten-year term, your monthly payment will be $15,186.77. In total, you’ll pay $1,822,412.40 over the life of the loan.

Increase the interest rate by just 1% and your monthly payment jumps to $15,909.83. When the loan is paid off, you’ll have sent $1,909,179.60 to the lender, an increase of more than $85,000.

Length of Payment Period

How long you have to pay the loan makes a big difference in both the monthly payment and the total cost of the loan.

The faster you pay the money back, the less interest you’ll pay but the higher your monthly bill will be. Shorter loans also tend to have lower interest rates, compounding the savings from your shorter payoff period.

Do you want a longer loan so you have more flexibility or a shorter loan to force you to save money on interest payments? If there’s no fee for paying the loan early, a longer loan can provide flexibility by reducing minimum payments while leaving you the option of paying the loan early.

Fees

The last thing you want when you need to borrow money is to have to pay fees. You’re already paying interest to the lender, so being hit with an application fee or closing fee just makes your loan that much more expensive.

You also want to avoid prepayment fees. Some companies will charge you extra if you try to pay them back early. If business is good and you want to get the loan off your books you don’t want to be paying extra for that privilege when you should be saving money by avoiding interest.

When comparing two lenders, all else being equal, look for the one with fewer, or at least more transparent fees.

Other Business Banking Services Offered

Keeping your business’ financial life at one institution can make things easier on you. You don’t have to spend time keeping track of what money is with which bank or where to send what check to cover which bill. If you already have a good business banking relationship with a lender, you should try to borrow money from them, if just to keep things simple.

As a bonus, many companies offer loyalty programs that reward your business for doing all of its banking with them. At the very least, the bank might be more willing to loan you money than another bank that doesn’t know your business well.

Customer Service and Support

You’ll want to know what kind of customer service your lender will be able to provide over the life of your loan. You want to work with a lender who you can easily contact should a check go missing or if you have trouble accessing your funds. Don’t let a small interest rate or fee savings trick you into borrowing from a company that will cause you headaches with its poor customer service.