You need money to make money is the old mantra that has guided the economy since as long as we can remember. And there is a reason why it lasts so long. It is true. Most small business owners, particularly in the early days of their business cannot provide sufficient funds to give their firm a good kick start and ensure stable growth. But that is why the business loans are there.


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According to a 2017 survey by the Small Business Administration, small businesses borrow $600 billion each year. To paint you a picture, this is more than, for example, Ireland’s and Finland’s GDPs combined. The average size of all business loans was $663,000, but more than half of all applicants applied for the amount of $100,000 or less.

While conventional bank loans are still tried-and-true ways to acquire money for your business operations, there are plenty of other options to consider. Here is a short, yet thorough, guide that will help you make your choice.

Consider how much money you need

Business owners decide for a loan because they need money they do not have right now. In that case, you should have a basic idea, or even better, an exact figure on your mind. However, you also need to be realistic with the amount you are asking for and be flexible since the lender will see it as a better understanding of the business’s potential and growth opportunities. When comparing loan offers, you do not need to be skeptic only about small loan offers, but also about the large one, because you might have troubles with paying more interest.

How much is it going to cost you?

Interest rates are not the only thing you should be paying attention to when calculating the costs of the loan. You should also ask the lender to give you the loan’s annual percentage rate and the APR, which includes additional fees like loan processing charges and origination. Furthermore, you could ask if your loan has a prepayment penalty or any extra costs.

Know your options

There are enough different loan types and lenders to make your head spin. Here’s a short look at the two most common types for small businesses:

  • SBA loans themselves include several different options such as the microloan program, disaster loans, 7(a) loan programs, 504 loan program, and others. All SBA loans are designed for small businesses and constructed with the understanding of the challenges the entrepreneurs meet today.
  • Traditional loans encompass different helpful programs such as a line of credit, equipment loan, merchant cash advance, and working capital loan. They are an excellent choice for small business owners who do not qualify for SBA programs.

Are you in it for the long or short run?

Some loans can be paid over the course of six months, while others can take up to ten years. Both short and long term option have their advantages and disadvantages.

Short term loans will allow you to free yourself of the burden of repayments in no time. However, multi-year loans usually mean larger sums and lower interest rates. Long term loans might not be for you if you are just getting started with your business, because they are, more often than not, offered to companies with proven track records.

Different term lengths determine different repayment schedules. For short term loans, you will probably have to pay smaller amounts more often. For long term loans, you will be obliged to pay larger sums less frequently.

How urgently do you need the cash?

Fast cash comes at a high price in the world of business financing. Asking for a quick loan raises some eyebrows in lenders and they need to be able to cover for potential losses, which means they will probably hike up their rates. The convenience of getting the money ASAP is something that, from where the lenders are standing, is something that has to be paid extra.

On the other hand, if you are prepared to wait for weeks or perhaps even for months, to secure funds for your business you could be getting significantly more affordable terms.

What’s the purpose of your loan?

We mentioned above several different types of loans. They could be your guide when considering the reasons for getting a loan. There are programs specifically created for acquiring new equipment, and there are also the ones directed to covering for late-paying customers.

You might need to loan to cover various expenses of your company or to make different investments. In that case, put everything on paper, see if you can encompass that with one program or do you need more options. If you are applying for several loans, make sure to set a list of priorities, and create an approximate budget for each demand.

Bottom line

Before you decide on a loan for your small business be sure that you fully understand your circumstances and needs. They may be completely different than the ones of your competitors, partners or friends. So, if you have heard about an excellent program with a low-interest rate, don’t go jumping in the bandwagon just yet. Perhaps you do not qualify for that specific program or that program doesn’t suit your need. Review all the tips above and take your time to think about it.

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