How to Compare Business Loans
Choosing the best avenue for funding a startup company can be challenging. There are several funding options available to you, from securing a line of credit to asking friends and family. However, each comes with its own set of terms and conditions.
Before jumping into any agreement, it’s wise to compare business loans and see which is the best fit for your future.
We’re going to discuss how to compare business loans today and which loan metrics you should focus on to find the right solution for you.
Types of Business Loans
Before delving into the maze of business loan fees and figuring out the cost of the loan you need, we will cover the most common business loans available, outside of the “3 Fs” (friends, family, and fools).
There are many different types of business loans, including working capital loans, SBA loans, and loans from friends and family.
Understanding the core differences such as repayment terms, annual percentage rates (APR), and standard sizes goes a long way into figuring out how to compare business loans.
SBA
An SBA loan is a line of credit issued by private lenders but guaranteed by the Small Business Administration (SBA). This type of loan is structured to ease the lender’s mind because if the loan defaults, they can collect their compensation from the federal government. There are different programs structured under an SBA loan, including:
- 7(a) loans
- 504 loans
- Microloans
Business owners can secure an SBA loan through traditional institutions such as a bank or a credit union. The difference between a standard business loan and a traditional one is that the lender will apply to the SBA for a loan guarantee.
Typically an SBA loan will have longer terms and lower interest rates than its traditional business loan counterpart.
One of the main differences between a conventional business loan and an SBA loan is the loan amounts and terms. A commercial loan interest rates comparison between a conventional bank and an SBA 7(a) loan will generally see the SBA loan at 5.50% to 8.0% with a ten-year repayment schedule. Conventional banks will have a business loan percentage between 3% to 7%, but with a shorter amortized schedule.
Keep in mind that even though lenders have earned a guarantee from the SBA, the federal government will require any individual with 20% ownership to put up personal assets as collateral.
Business Lines of Credit
Another alternative to a conventional business term loan is to secure a business line of credit. Through a business line of credit, you will receive access to upfront lump sums of cash. As long as you don’t overextend yourself past the established line of credit, you can keep reusing the funds during the repayment term.
Business lines of credit typically come in two forms:
Secured
A secured line of credit is issued to the borrower after they have put up collateral, usually inventory or property. Defaulting on the loan will mean the forfeiture of these assets.
Unsecured
An unsecured business line of credit is issued without collateral being placed upfront. However, many lenders will still require some form of personal guarantee, meaning they can take action to seize your home or other personal assets if you default.
Entrepreneurs seeking a business line of credit generally have the best experience if their funding goals are short-term or are required for a single, one-time expense.
Term Loans
Term loans are traditional loans when you need a large sum of cash for a specific purpose. The payments will then be spaced out over a fixed period with a set payment schedule.
The size, scope, and terms of these types of loans will vary between lending institutions. Lenders such as banks may offer competitively priced rates but will have the strictest prerequisites that need to be fulfilled in order to obtain one. They will also require the most time to process, meaning if you need funds immediately or don’t want a long repayment term, this isn’t the best option available.
An alternative would be to choose an online lender. These financial institutions typically have a variety of merchant funding options, looser prerequisites, faster funding, and shorter repayment terms than banks.
While figuring out how to compare business loans, you’ll learn that there are other options, but these three are the most common you’ll come across.
Business Loan Metrics
Once you understand the different types of loans available, the next part is determining the total cost of a loan. You’ll have to perform a deep analysis of your current financial standing and your projected one. It can significantly affect which loan is the best fit for your business and impact the final business loan cost.
Here are three metrics to get you started:
APR
The first metric you want to compare is the APR attached to the loan. The loan’s APR represents the yearly cost of funds over the prescribed term. While it will include fees and associated costs, it will not include compounding. It’s best used as a metric to compare versus actualize the total cost of a loan.
Term Length
Most lenders will offer different product solutions, and each will come with its own term length. Typically, the longer the term coupled with a larger amount borrowed will equate to more interest due, increasing the overall loan cost. If your company is already established and looking to expand, then a longer term may make sense. However, if you require a quick solution, a short-term loan may provide the relief you currently need.
Prepayment Conditions
Finally, you will want to scour over the prepayment conditions. Lending is a business, and prepayment can cut into their bottom line, so you’ll want to be aware of any fees attached to closing a line of credit before the term is over.
Let L3 Funding Help You Succeed
L3 Funding is designed to get small businesses off the ground or through tough spots. If you need access to merchant funding fast, we offer a host of merchant funding solutions. If you want to learn more about how to compare business loans or are seeking financing for your business, contact L3 Funding today.