Did you receive a business loan offer letter? Or have you applied for financing and received a preapproval or 2? How do you know which funding option is right for you? Here are 5 essential tips to follow when you’re evaluating business loan offers for your company.
1. Understand Your Offer and Terms
When comparing your small business loan offers, start by finding out your principal, interest rate and loan terms. Here are several questions to ask:
- How much are prospective lenders willing to fund you?
- Are you required to provide a down payment? If so, what percentage will you be required to put down?
- What type of loan or financing have you been offered? (e.g., SBA loan, credit card, business line of credit)
- Are lenders quoting you an annual percentage rate (APR)? This is a percentage that represents the annual cost for the loan over the repayment term. This is different from interest rates because APR includes the interest rate and other financing fees.
- Is your interest rate fixed or variable? With a fixed rate, your payments won’t change. However, with a variable rate, your payments will fluctuate because they’re tied to a benchmark interest rate, such as the prime rate, that changes over the course of the loan.
- Are lenders quoting you a factor rate? Factor rates are expressed as a decimal figure (e.g., 1.2) and associated with alternative financing, such as merchant cash advances and accounts receivable financing.
- How long will you be required to make payments?
2. Be Clear on Your Required Payments and Charges
In addition to the interest rate you’ve been quoted, other fees will likely apply. These could include origination fees, annual charges and maintenance fees. This is why knowing your APR is key to knowing the true cost of your loan.
While your lender should be able to provide you with your total repayment amount, there are online tools that can help you calculate the annual percentage rate.
Also, understand your payment schedule and any penalties that could be imposed. Find out the following:
- How much are your payments?
- When are your payments due?
- Will you have daily, weekly or monthly payments?
- Will you need to set up automated payments?
- Are there any penalties for prepayment? (And, conversely, are there any benefits for prepayment?)
- Are there any late fees?
If you’ve been quoted a factor rate, you can calculate your total repayment amount by taking the amount you’re advanced and multiplying it by your factor rate. For instance, $10,000 multiplied by a 1.2 factor rate would give you a total repayment of $12,000. You can also convert your factor rate to APR. This can give you helpful insight and provide you with a way to compare different financing products and rates side by side.
3. Check If You Have an Unsecured or a Secured Loan Offer
“What is a loan offer?” While you already know the answer to that question, you might not know that some lenders require you to pledge assets in order to secure financing approval. These assets, referred to as collateral, can be equipment, invoices, vehicles and more. Be sure to ask your lender whether you’ll need to offer some sort of collateral in order to be financed.
Keep in mind, loans secured by collateral often have more competitive interest rates and longer repayment windows compared to unsecured loans.
Many lenders could also require you to provide a personal guarantee before you’re granted funding. This means that if you can’t repay your debt, your lender could hold you personally liable for the losses. The Small Business Administration (SBA), for instance, requires any person who owns 20% or more of a business to provide an unlimited personal guarantee for SBA-backed loans.
While these factors shouldn’t necessarily stop you from accepting a loan offer, they are aspects you should understand before you sign on the dotted line.
4. Consider the Timelines
Is speed your top concern, or do you have time on your side? These are factors to consider whether you’re in a cash crunch and need funds fast, or you’re looking to invest in a long-term venture.
Keep in mind, with certain lenders, applications can take a few weeks to months to be approved and funded. Also, you might not be approved for the loan amount you initially requested, but some lenders may come back with a counter offer loan, which could affect your timeline.
While conventional banks offer competitive rates and terms, they might require a lot of financial documentation before they consider providing you with a loan offer. For instance, you might be required to submit profit-and-loss statements, bank statements, tax returns, a business plan and more.
In contrast, many alternative lenders have quick online applications and require only a few months of bank statements if you meet their requirements for a minimum credit score, revenue and time in business. In many cases, these online lenders can provide funding within a day. In exchange for speed and convenience, you’ll likely see shorter repayment periods and less competitive rates.
5. Research Your Lender
As with any major financial decision, be sure to do your due diligence. One helpful resource is the Better Business Bureau (BBB). Visit the BBB’s website and search lenders by name. The BBB will let you know the company’s rating with a letter grade, A+ being the best, F being the worst. You can also see any consumer complaints submitted to the BBB.
Also search for a company online and see what borrowers are saying. The lender’s reputation on the web can also provide some valuable insight. In addition, consider how long a company has been in business.
Final Thoughts When Deciding on the Right Loan Offer for You
Before deciding which loan offer is right for you, consider how much you really need to borrow. Too much and you could be on the hook paying interest on funds you don’t need. Too little and you may consider taking out another loan to make up the difference.
Average Business Loan Amounts
The average loan amount at small regional banks was $146,000, while funding averaged $593,000 at large national banks, according to 2017 from the Federal Reserve. How do your financing needs compare?
Also consider using an online business loan calculator. By inputting a loan amount, interest rate and repayment period, you can get a glimpse of your estimated repayment amount and installment payment. Do this as often as you’d like to compare various loan offers.
Once you’ve decided which loan offer is right for you, how to decline an offer is easy. If lenders contact you and want to know what you’ve decided, just say no, thanks. That’s it. Move on to the best business loan offer and lender for you.