Business Loans: Reviews & Comparisons
Many entrepreneurs and business owners launch their companies with bootstrap financing. But for larger ventures, business loans are a necessity.
To get a business loan, you'll need a strong credit profile, a healthy FICO score, and a comprehensive business plan. But how do you choose the right lender? What types of business loan are available? And how can you compare business loans?
SuperMoney's business loan comparison tools and reviews can help you find a business loan. However, it helps to understand the basics of business loans types, terms, and rates before you start shopping for loans.
Here are the basics you should know when comparing business loans.
Are there different types of business loans?
Short answer: yes! There are several different types of business loans. When seeking funding for your business, you can take out a secured business loan or an unsecured loan. The interest rates on your loan can be fixed-rate or variable-rate. And your loan might be issued by a private lender or by a federal government.
Let's dig a little deeper into these distinctions:
What is the difference between a secured and an unsecured business loan?
A secured loan is secured by collateral, such as cash, paper assets, CDs, stocks, or bonds. An unsecured business loan, on the other hand, requires no collateral.
If you have middling credit, you have a better chance of getting approved for a secured business loan than an unsecured loan. That's because collateral reduces risk for a lender, making it safer for them to loan money to less creditworthy, more high-risk borrowers.
Secured business loans are also a common means for purchasing costly equipment or inventory. In these cases, the property purchased serves as collateral for the loan.
If you have great credit (or if you lack assets to pledge as collateral), an unsecured loan is a better fit for you.
What is the difference between a fixed-rate and a variable-rate business loans?
Fixed-rate loans maintain the same interest rate throughout the lifetime of the loan. The interest rates of variable-rate loans, on the other hand, fluctuate with the market. Both options have their benefits.
The predictability of fixed-rate business loans makes it easier for you to plan your budget. Plus, it lets you lock in a low interest rate (assuming you qualify for one).
However, variable-rate interest loans often carry lower initial interest rates. This can be a serious advantage if you can repay the loan in full while interest rates are still low.
What are the differences between government and a commercial business loans?
Borrowers can apply for a business loan from either the federal government, or from a private lender. Again, each option has its benefits.
Government-funded business loans typically offer lower interest rates than private lenders can afford to. That's because these public organizations aren't out to make money -- their primary agenda is to promote and support small businesses.
If you want a government-funded loan, try the Small Business Administration (SBA). The SBA is one of the best sources for business loans because of their low interest rates and favorable repayment periods. SBA loans offer especially good funding opportunities for women, veterans, and members of marginalized groups who may face discrimination from private lenders. However, the lending process for SBA loans can be demanding and lengthy.
While publicly-funded business loans typically have lower rates, private business loans win out in flexibility. Commercial lenders are often more willing work with you to come up with mutually favorable loan terms. They also often have less stringent requirements for their applicants, and can be a good backup if your application is denied by the SBA.
How to compare business loans?
When shopping for a business loan, consider the following factors:
What are the eligibility requirements?
In order to get approved for a business loan, you must have all or most of the following:
- Legal business existence (e.g. DBA, LLC, Inc.).
- Business banking account(s).
- Business plan (see below for more details).
- Business tax forms and financial records.
- Explanation for loan purpose.
- Personal credit report and financial records.
What kind of a business plan do you need?
Ideally, you should develop a formal business plan before launching your company. But in reality, many entrepreneurs skip this step. However, commercial business lenders, government business lenders, and many alternative business lenders require a well-executed business plan. As such, if you've skipped this step before now, it's time to get started.
At minimum, your business plan should include the following elements:
- Company description (including type of business, e.g. partnership, corporation, etc.)/
- Service or product offered.
- Bios and personal financial statements for principal officer(s).
- Company financial statement.
- Market and industry analysis.
- Marketing plan and sales strategy.
What are the interest rates?
Do you prioritize reliability and consistency in your budget? If so, opt for a fixed rate. Looking to pay off your loan fast and keep costs low? Then a variable interest rate loan may be right for you.
If you want to keep your interest rates low, apply for government-funded business loans first. Then, if your applications are rejected, you can turn to private lenders. And if you have bad credit, consider letting a colleague with better credit apply for the loan instead.
Not sure what qualifies as a competitive rate? Check out SuperMoney's list of top business loan lenders. Read on to compare their interest rates side by side:
What are the terms?
Loans with longer repayment terms translate to lower monthly payments. In the short term, this might be easier to manage -- but it'll also cost you more overall. Additionally, interest rates on loans with longer repayment terms tend to be higher.
To keep costs low, look for a loan with the shortest term that you can still comfortable afford.
What are the fees?
Like most loan types, business loans come with fees. Lenders may charge origination fees, service or processing fees, prepayment penalty fees, referral fees, packaging fees, late payment fees, and more.
When you compare prospective business loan lenders, find out exactly how many fees each charges, and how much each fee costs. Then, add these costs to the loan amount to find the true cost of the loan.
What do their reviews say about customer satisfaction?
You want a lender that is reputable, reliable, and communicative, not one who will disappear on you whenever you encounter a technical issue. The only way to know what to expect from your lender is to read honest, unbiased reviews from past customers. If several past borrowers cite the same problem in their reviews, you're likely to encounter that issue, too.
What alternatives are there to business loans?
Some small business owners find that despite their best efforts, their requests are rejected by their bank, credit union, and even the SBA. Fortunately, alternative lending sources provide another way to find funding. Consider the following:
- Vendor lines of credit. If you don't need a large sum of money right away, consider a vendor line of credit. By opening and maintaining a separate business bank account, you can establish business credit. And by opening a line of credit in that business bank account, you can establish a relationship with your lender. This will also make it easier to get a traditional business loan if you need one down the line.
- Credit- or invoice-based financing. If you have fair or poor personal credit, you might not be able to get a loan through traditional means. Instead, consider financing your start-up with a service that purchases invoices or claims a percentage of incoming credit card transactions.
- Non-bank business loans. There are a few different options here. Peer-to-peer lending adapts the crowdfunding model to business loans. And lending brokers adapt the peer-to-peer model to a curated group of lenders (rather than the general public).
Putting it all together
If you need a business loan, your first step is to do your research. How much are you looking to borrow, and how much can you afford to pay each month? Can you qualify for any specialized government-funded programs? Does your credit qualify you for competitive rates on a commercial business loan? Which lenders offer loan terms that work for you?
If you're feeling overwhelmed, you're in luck. SuperMoney has streamlined the research process with our business loan engine. Just answer a few quick questions to get a ton of personalized offers from leading business loan lenders. It's fast and easy, and pre-qualifying won't hurt your credit score.
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