Key takeout
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Check your lender’s minimum qualification requirements, including credit score, business time, and revenue
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Before choosing a lender, decide on the type of loan
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Compare loan offers from multiple lenders to make the best decision
With so many options in the market for small business lenders, it can be difficult to decide which lender is the right option for your business. You will want to do your research and compare lenders to make sure you make the best decision. Narrow your list of lenders by reviewing lenders’ eligibility criteria and reputation.
Next, consider the loan terms, interest rates and fees offered by the lender and compare those features with other business lenders. You can also prequalify if it helps you check the terms of loan offered without a hard credit check. Learn more about what to look for when choosing the best SME loan for your business.
Factors to consider when choosing a lender for small business
To choose the right SME lender, remember the type of funds and loan amount you need while researching the features associated with each lender. The factors to search are as follows:
1. Consider your funding needs
The first step to choosing a small business loan and lender is to determine your financing needs. First, determine how much you need to borrow by evaluating the cost of the purchase you need to buy. With numbers in mind, use a business loan calculator to determine if you can actually afford to borrow. You can add estimated repayments to your budget to see if you can comfortably cover your repayment amount.
Next, you need to decide on a type of small business loan. Knowing the type of business loan you need can help you find a lender who will provide that loan. Common types of business loans to consider:
| Types of business loans | explanation |
| Term Loan | We provide lump sum cash for certain purchases. You will repay the loan during the time set by interest and fees. |
| Equipment Loan | We provide lump sum to purchase commercial equipment. Typically, conditions last from 1 to 5 years. |
| SBA Loan | Supported by US Small Business Management, these loans can help small businesses qualify for business loans even if they are unable to raise traditional funds. SBA loans have maximum interest rates and long-term repayment terms. |
| Credit business line | It offers revolving credits that can be accessed repeatedly when necessary. You will borrow up to the credit limit and pay interest only on the amount you borrowed. |
| Invoice funding | We provide funding based on the amount of outstanding invoices. While waiting for the customer’s invoice to be paid, you can move your money forward. |
| Merchant Cash Advanced | We provide funding based on past debit and credit card sales volumes. This advance will be repaid at a percentage of future sales. This loan usually comes with a high interest rate that can reach 100% or more, so it is recommended to use it only in emergencies. |
2. Think about the type of lender
Now that you know the type of funds and the amount you need, it’s time to explore your options. You can choose from several different types of small business lenders, such as traditional banks, credit unions, nonprofits, or online lenders. Think about what each type of lender offers and the advantages and disadvantages of working with them.
| Types of lenders | Loan provided | explanation |
|---|---|---|
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Banks or credit unions |
Term loans, credit lines and equipment financing | It offers attractive interest rates and generous loan terms. However, eligibility guidelines are often strict and funding times can be slow. |
| SBA approved lender | 7(a) SBA loans including loans, microloans, 504 loans and express loans | It offers government-supported loans with long repayment terms and competitive interest rates. Funding times are slow, often taking 30-90 days. |
| Community-based lenders and nonprofit organizations such as CDFI and MDIS | Period loans, SBA loans, micro loans | It supports business owners in underserved communities that have historically lacked access to capital. Designed for underserved small business owners, these lenders are more accessible, even when they have credit score challenges. They may offer less loan sizes than traditional banks. |
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Alternative lenders including online, direct, peer-to-peer lenders |
Short-term loans, microloans, bridge loans, credit lines, invoice factoring, and merchant cash advances | Provides flexible eligibility guidelines for startups and bad credit. You can also prequalify without a soft credit inquiry or credit check. However, they often come with high interest rates and fees. |
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- Credit score. Most lenders have minimum credit score requirements for small business loans. In many cases, a FICO score of 670 or above takes into account a good score. Some people check their business credit scores, especially if they are pursuing a large amount. A higher credit score can lead to lower interest rates.
- The ratio of debt to income. The lender will also assess the debt-to-income ratio to determine whether your company is in financial position to handle more debts and whether it is overexpanded. The rule of thumb is to keep your DTI at around 36%, although lenders may accept it more. You can reduce your DTI ratio by paying off your debt and increasing your profits.
- Business time. Typically, you need to have a business of two years or more to qualify for a business loan from a bank. However, some lenders will consider raising funds if they have been established for at least six months.
- Annual revenue. Lenders also typically have the annual minimum revenue requirements that they must meet to consider small business loans. These are typically between $100,000 and $250,000.
When evaluating lenders, ask about the specific requirements for the loan products you are considering. Some people are stricter than others and may or may not be suitable for your company.
Consider lender eligibility requirements
Second, we recommend that you look into lenders who accept business credentials so they are likely to be approved. Many lenders post criteria online for their minimum credit score, business time, and annual revenue required to qualify for a loan. Keep these general guidelines in mind to understand what your lender needs.
- Credit score. Most lenders have minimum credit score requirements for small business loans. In many cases, a FICO score of 670 or above takes into account a good score. Some people check their business credit scores, especially if they are pursuing a large amount. A higher credit score can lead to lower interest rates. However, you can find online lenders with low credit requirements of 600.
- The ratio of debt to income. The lender will also assess the debt-to-income ratio to determine whether your company is in financial position to handle more debts and whether it is overexpanded. The rule of thumb is to keep your DTI at around 36%, although lenders may accept it more. You can reduce your DTI ratio by paying off your debt and increasing your profits.
- Business time. Typically, you need to have a business of two years or more to qualify for a business loan from a bank. However, some lenders will consider raising funds if they have been established for at least six months.
- Annual revenue. Lenders also typically have the annual minimum revenue requirements that they must meet to consider small business loans. These are typically between $100,000 and $250,000.
When evaluating lenders, ask about the specific requirements for the loan products you are considering. Some people are stricter than others and may or may not be suitable for your company.
4. Consider the lender’s reputation and customer service
Second, you want to ensure that your clients have a mostly positive experience when working with lenders. You can learn a lot about lenders based on past and present customer experiences.
Check out TrustPilot online reviews and complaints from the Better Business Bureau (BBB) ​​platform to determine whether most of the feedback is positive or if there is a source of concern. For example, a government lawsuit against a company listed in the BBB profile could be a red flag.
Consider positive and negative reviews that provide specific feedback. Some negative feedback is normal, but if you find a lender with many negative comments, you should consider moving forward, especially if you are mentioning problems with receiving funds or working with a lender if you run into financial difficulties.
You can also ask other small business owners what lenders they have used and what their experiences are.
5. Consider the application process
Finally, we recommend comparing multiple lenders with their loan offerings before finalizing the SME loan you choose. Many lenders only require soft credit checks and offer online pre-approval or pre-qualification that does not damage your credit score. If you have a match, you can view potential loan offers, including terms, interest rates, monthly payments, and more.
If you decide to move forward or prequalify, a hard credit inquiry will be generated. You can reduce your score a few points, but your credit score should recover relatively quickly.
Questions to ask when choosing a lender for small business
Check the estimates of loans received, compare them and choose the best SME loan for you. When evaluating each option, consider the following:
- Which lenders offer the lowest interest rate?
- Is the interest rate fixed or is it a variable? Is the interest rate fixed or is it a variable? Fixed fees offer predictable repayments, but variable interest rates can rise at any time.
- Will the lender charge an origination fee? Will the lender charge an origination fee? If so, compare the amount that other lenders charge for this fee, usually 2-5% of the loan amount.
- If I decide to pay off my loan early, will I have an advance penalty?
- Can I apply online or do I need to visit a physical branch?
- How quickly can I receive funds? Think about how quickly you will need funds to cover your purchase.
- Can I manage my loan online?
- Do I need collateral? You may need to consider whether you have enough assets to support the loan.
- Do your company’s budget loan term and monthly payments work?
- Is face-to-face support available or is it limited to online or telephone support? Consider whether you are satisfied with telephone support alone and whether you can easily reach the company.
Ultimately, the chosen lender should have a good reputation and provide the minimum borrowing costs available. Their application process and funding timeline should also meet your needs.
Application for small business loans
The final step is to formally apply for a small business loan. Make sure to gather the necessary documents before applying to speed up your application process.
Many lenders can apply online, but some lenders – banks in particular, need to move forward to visit branches or make a call. After submitting your application, you will receive a decision or request from the lender for additional information to process your application.
Typically, online lenders will provide their decision within minutes or within the same business day. Expect to wait a few days with most traditional lenders.
Once the lender issues final approval, review and sign the loan document. The lender will then close the loan and pay you the proceeds from the loan.
Conclusion
Business lenders offer very different business loans, terms, interest rates and types of features. To determine which lender is right for your business, you start by understanding your unique needs and the type of business loan you are looking for, so that you can choose the right lender.
Also, get used to the requirements you expect from each lender. Then, if possible, prequalify using multiple lenders to select offers at the lowest rate and the most favorable terms offered to your business.