How to Compare Business Loans

Finance Insights for Professionals

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Tuesday, September 10, 2019

Business loans are an important method of gaining the finance you need to expand, but there are a lot of options out there; how should you compare them?

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Loans are one of the more common ways a business can raise the finances it needs in order to grow, whether that means opening a new branch or simply buying a new piece of equipment. However, there’s no such thing as a standard business loan, and most companies have plenty of different options.

Choosing the right loan for your firm is a difficult and incredibly important job, and not one to be rushed or taken lightly. However, working out what makes a good business loan can be difficult, especially when you feel overwhelmed by choice. Here are some of the things you should be looking out for when comparing loans.

Compare interest rates

The interest rate of a loan determines how much you’ll actually pay over its lifespan, so it’s one of the most important factors in your decision. However, the size of the interest rate you should expect depends on the type of loan you’re going for, how far along your business is, and the type of organization you intend to borrow from.

For example, the typical interest rate on a small business loan ranges from 4% to 6%. However, large banks might be able to offer you a more competitive rate, while online or alternative lenders could offer you attractive loans but with incredibly high interest. Make sure you calculate how much the loan will cost you in total over its lifespan before you commit to anything.

Find the right lender for you

There are a number of different options when it comes to choosing a loan provider. While the majority of businesses still go to a bank for financing, there are different organizations out there that can help. Online lenders are growing in popularity, while credit unions and Community Development Financial Institutions (CDFIs) are underused.

A lot of it depends on the amount you need to borrow. The average business loan was $663,000 in 2018, and large banks dealt in similar amounts of money. However, smaller regional banks averaged loans of $146,000, while alternative lenders typically dealt with around half that amount. If you know how much you want to borrow, you can use that figure to guide you to a lender.

Check the small print

One of the main things PayPal states businesses should avoid when looking for loans is hidden fees. These could be for paying late, paying early or simply for processing the loan, and while they might be small individually, they can quickly add up. You should scour any potential lender's terms and conditions for fees such as these to make sure you aren’t going to end up paying more than you expect.

Similarly, check to see if there’s even a point applying. Only 62% of business loans get approved, and often if you’re on the cusp of being rejected, you won’t be able to get good terms on a loan. Always check to see you safely qualify for a loan with specific lenders before entering into negotiations to ensure you don’t end up with a bad deal.

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