If your business is struggling to stay afloat in 2021, you are not alone. The pandemic has hit small businesses particularly hard, and for many it is impossible to pick up where they left off. Capital spent at the beginning of 2020 is long gone and it may be difficult to find investors. Checking out a comprehensive business loan website which reviews the various financing options available is a good idea, but you can’t really tell what’s the website’s commercial interest and whether the recommended services are indeed suitable for you. That’s why you have to take an extra step and UNDERSTAND the why, how and where of business loans before making long term interest-heavy commitments.
However, many small business owners have no idea where to start when comparing the business loans available to them. Choosing the best option is not as easy as looking at numbers on a page. You need to know about the different types of loans available as well as how to spot the differences.
There are very real consequences to making the wrong choice for your business. Predatory lenders feed off ill-considered decisions, making money from your business’s downfall. You can find yourself stuck in a never-ending cycle of debt.
These are the top 5 tips on how to compare various funding offers from online lenders.
1. Secured vs Unsecured Loans
The first decision you are going to have to make is a big one. Do you apply for a secured or unsecured small business loan?
The difference between the two rests on what will happen if you default on the loan. A business loan is secured when there is an asset that can be taken or a guarantor who will pay if you don’t meet the conditions of repayment. This lessens the risk considerably for the lender, leading to much lower interest rates. However, if you have no assets available to use as security and no one to serve as a guarantor, you will have to consider an unsecured loan.
With an unsecured loan, the lender is taking on a lot of risk. Lenders use this as a justification for charging exorbitant interest rates. With an unsecured loan, you are going to end up paying back many times more than you borrowed.
2. Consider a Business Line of Credit
If you cannot get a secured loan and don’t want your loan to cost you more than it is worth, consider a business line of credit.
A business line of credit works like a credit card. Instead of getting a lump sum of money, you only take what you need right now. You use the business line of credit to pay for any upfront costs, as well as expenses that occur as time passes.
By taking this approach, you only pay interest on the money you actually use. A business line of credit is therefore useful for a small business with more fluid expenses. However, it will usually come with a high interest rate for the money you do spend.
3. Bad Credit Loans
Your credit rating provides a numerical history of how conscientiously you have paid back debt in the past. It is a fairly rigid way of looking at your credit history, but it is trusted by lenders as the most definitive evidence of whether you will pay back your loan.
Many small business owners with bad credit therefore do not even consider applying for small business loans. They assume that they will not be able to get loans and that it is futile to try.
However, there are many private lenders that accommodate business owners with bad credit ratings. There are even loans that are geared towards people with bad credit. These bad credit loans may be the only available option if you have made financial mistakes in the past.
The problem with bad credit loans is that some lenders take advantage of the fact that you have nowhere else to turn. They charge extremely high interest rates and benefit if you struggle to pay back the loan. In some cases, getting a bad credit loan is simply an expensive way of hanging onto your business for a little bit longer.
Try to be realistic about whether the loan is a good idea. Get a third party opinion if you can, as you will have a hard time being objective.
4. Fit Out Finance
Certain businesses will benefit from fit out financing. Fit out financing is specifically geared towards businesses that require storefronts or restaurants. The business does not necessarily need a lot of capital to run, but it needs money to get off the ground. This will include the first months’ rent, décor, goods, etc.
Since these businesses are opening on the basis that they will start seeing income from in-person sales, it might also be worthwhile to consider a merchant cash advance. This is credit that you will automatically pay back when a patron pays by debit or credit card. This may be a percentage of each transaction or a fixed amount each month.
Loans like these, which are customized for specific purposes, can be perfect when you are trying to keep your finances tight.
5. What About Personal Loans?
Many small business owners who are struggling to find the right business loan consider taking out personal loans instead. It is indeed possible to get capital for your business this way, and many people do so. However, is it a good idea?
The benefit of a personal loan is that your funding will be approved fairly quickly. But there are significant downsides. You won’t be able to get all that much capital, and your personal credit is at risk. The loan is also going to cost a lot more than it is worth.
This is a case in which you need to consider carefully whether the loan is likely to lead to success. Often, these types of loans end up being another nail in the coffin of the business rather than its saving grace. In the end, the loan benefits no one but the lender.
Why Are Small Business Loans So High Risk?
You may have heard that no matter which type of small business loan you get, there is always going to be a lot of risk. Why is this the case?
The private lending industry is not nearly as regulated. While there are consumer standards that need to be met, private lenders are allowed to approve loans with far less oversight. There are now many private lenders who take advantage of this lack of oversight and exploit desperate business owners.
This also means that lenders may well choose to give you a loan knowing that you are unlikely to meet its conditions. Instead of giving you the best loan for your business, they may give you a loan that will leave you in debt to them for years to come.
There is always risk when it comes to financing a small business, as many of the decisions you make are going to come with some emotional attachment. That is unavoidable. This is why it is best to get the opinion of an objective third party, who has no connection to your business and will be able to tell you if your decisions are indeed sound.
Getting a small business loan should be something you give a lot of thought and care. Choosing the right small business loan may well make or break your company.