When you need money for your business, it can be extremely tempting to seek out the lowest loan interest rates on the block and look no further. But low interest rates don’t guarantee that a particular loan is the right one for your business. The ideal loan will be the one that meets your company’s financial and strategic requirements, as well as your timeline.
So next time you’re tempted by that low percentage, make sure you ask yourself these three questions before you sign on the dotted line:
What Type of Loan Fits My Needs?
You’ll find several different categories of business loans in the marketplace, each offering pros and cons depending on how you plan to use the funds. For example, an installment loan, which is repaid in regular payments covering the principal and interest, is best suited to purchase assets that will benefit your business over many years. Think heavy equipment or real estate, for instance.
A line of credit loan might be the solution if you need cash on hand to keep inventory up to date or loosen the occasional clog in your cash flow. With a line of credit, the lender transfers cash to a checking account, and you pay interest on the amount you draw from the account.
How Fast Do I Need the Money?
Some business loans fit into a long-range plan for business growth. But when you need cash to respond to an unexpected event, you need it now.
Maybe you’re hiring extra staff because your top client has pushed up a project deadline. Or the money might be to replace a delivery truck that just broke down.
It can take months to get a conventional bank business loan approved and the funds into your account. When your company is facing a financial emergency, the solution might be an alternative loan. Alternative lenders use an online application and financial technology to speed up the evaluation process. As a result, many qualified applicants can have loan funds in their accounts in as little as 24 hours.
Which Loan Terms Are Best for My Situation?
The length of the repayment period can have just as important an impact on the cost of borrowing as the loan interest rates. The general rule is that the longer the term, the smaller the monthly payments and the larger the overall cost, because the interest is compounded over a longer time.
To make sure you’re choosing the most cost-efficient loan for your business, consider how you plan to use the funds, as this SCORE article suggests.
A short-term business loan of six to 12 months might be ideal for meeting seasonal inventory demands or recovering from a natural disaster or equipment breakdown. Longer-term loans of four to 10 years work best for things like buying a new warehouse or renovating your business.
Life is full of temptations. Some are worth giving in to; others can be as unsatisfying as a stale cookie. The next time you’re shopping for a loan, don’t blindly chase the lowest interest rate, however tempting it may be. By asking a few additional questions, you can help ensure you find the loan that’s right for your business — and that’s pretty sweet!