We’ve all seen how far alternative finance has come since the term first emerged, as well as the decline (and partial recovery) of bank lending to small businesses.
But with more choice in the market than ever, there are lots of factors to consider to find the business loan that’s most suitable for your business.
Get it right, and you stand to give your business a real boost. Get it wrong, and you might find yourself tied into a loan that doesn’t suit your firm.
So without further ado, here are the five most important questions to ask if you’re looking for the best business loan for your company.
1: How long do you need the money?
The mainstream banks usually have a minimum term length, and it’s now quite common to see alternative lenders that specifically offer short-term business loans.
Some of these short-term business loans are designed to be used for only a few weeks at a time; perfect for bridging a cash flow gap or covering a short-term cost.
Because the term lengths are shorter, the interest rates tend to be higher, so it’s easy to get caught out if you end up taking longer to repay the money than you originally planned.
On the other hand, if you find yourself in a position to repay a loan early, it would be frustrating to find out that your chosen product has early repayment fees that cancel out any cost benefits.
2: How much do you need?
Another rule of thumb is that the more you borrow, the more the overall cost and the harder it is to secure.
That means it’s important to carefully assess how much you need. For many businesses, it will make sense to take out a loan for the minimum amount needed for a project, and top it up later on if necessary. Having said that, there will be other situations where it’s simpler and easier to know you’ve got the full amount you need up front, without needing to reapply or request additional funds.
There is also a variety of revolving credit lines and overdraft-style facilities available, many of which will only charge interest when you draw funds. Such products can be useful to have in place if you need cash at short notice.
3: What can you use as security for the loan?
The concept of security for business loans always comes back to the lender’s risk. Put simply, lenders like to have a charge over tangible assets like vehicles, machinery or property, which they can sell if you fail to make repayments. That way, they know they’ll get their money back whatever happens.
Following this logic, unsecured business loans (ie loans that are not based on any security) represent a higher risk for the lender, and therefore can be harder to get unless your business has a strong track record. However, an important point to note is that although they don’t require physical security, unsecured loans will often require a personal guarantee from the business director, which could mean you’re indirectly involving your personal assets.
Alternative finance offers a lot of variety here, and there are lots of things you can use as security for a business loan. The most obvious would be ‘hard assets’ like commercial property and heavy machinery, and there is a variety of asset-backed lending that uses assets like these.
If you offer trade credit, invoice finance is a well-known way of unlocking funding from unpaid invoices. Alternative finance offers new types of this familiar product, with online auctions and same-day applications being some of the advantages.
For companies that take card terminal payments, merchant cash advances are a creative new way to use them as ‘security’; the loan amount is based on recent card terminal transactions, and is repaid as a percentage of them too, so it’s flexible funding that goes up and down with your business.
The most important thing to bear in mind is that the type of business loan you choose will largely depend on what security you can offer, whether that’s a building, your unpaid invoices, or a personal guarantee.
4: How quickly do you need the money?
Sometimes you’ll have a few weeks’ leeway before you need to have a funding line in place. Other times, if you don’t get a loan within a few days you’ll miss out on a great opportunity, or worse, fail to pay a bill on time.
Many lenders can get funds to your account within days or even hours, but more complex deals will usually take a little longer to arrange. Bear this in mind if you have something on the horizon that could require funding, because even if a product fits your business perfectly, it will be no help at all if you can’t set it up in time.
If your business is unpredictable or opportunities come up at short notice, you can be prepared by having the standard documents ready that lenders are likely to ask for, like your last few months of bank statements and up-to-date accounts. At Funding Options, we find that most of the delays in setting up finance are down to the business rather than the lender, so having these things ready will usually help you secure funding as quickly as possible.
5: How predictable is your business’s future?
This final question is important for two reasons. Understanding your figures is crucial not only for applying for the loan, but also for understanding your ability to pay it back. Of course, finance providers should lend responsibly and assess your affordability, but there are other things to consider on this front too.
If you’re getting finance with the aim of growing your business, you should really have detailed forecasts that map out exactly how the loan is going to turn into profits down the line.
Understanding your growth trajectory will also help you choose between fixed repayments and a flexible facility. While there’s nothing wrong with repaying a fixed amount every month, it’s not necessarily the best option if your business experiences peaks and troughs in trading.
Seasonal businesses often prefer turnover loans, which are based on your monthly turnover and are repaid as a percentage of it, so you pay more in a good month and less in a slow month.
The range of business finance on the market is both positive and negative. It means there’s an option out there to suit a broad spectrum of businesses, but narrowing down the right one for you can take time. If you’re struggling to find the best business loan, matchmaking services like Funding Options can help you get on the fast track to finding the right finance for your business.
Ask yourself these five questions, and you may be surprised by how quickly you can discover what the best business loan is for your company.