Looking for a small business loan but feeling overwhelmed by the choices? Not sure which lender is right for you?
Don’t worry—you’re not alone.
A business loan can be the key to help buy new equipment, boost your inventory, or kick off a marketing campaign.
And with so many banks, credit unions, and online lenders out there, picking the right one can be tricky.
I’m here to help you navigate this process and find the best fit for your business.
With over 25 years of experience as a financial coach and banking expert, I’ve helped countless business owners navigate this exact challenge, and today, I’ll help you break all of it down and find the best fit for your business together.
Stick around and scroll down to learn more about how to choose the right small business lender.
With these tips, you’re well on your way to finding the perfect loan for your small business.
Let’s make this process smooth and stress-free!
Factors to Consider When Choosing a Small Business Lender
Before you sign on the dotted line, it’s crucial to compare lenders and their terms. Here’s what you need to know to make an informed decision.
1. Consider Your Needs
First and foremost, determine exactly how much funding your business requires.
This means taking a close look at your cash flow, outstanding debts, and any unmet needs.
Maybe you need funds for new equipment, additional inventory, or even a marketing campaign.
Knowing the specific amount will help you in finding a loan that fits.
Once you have a figure in mind, use a business loan calculator to see how much you can afford to borrow without straining your finances.
Additionally, think about the types of loans available.
Depending on your revenue and loan amount, certain loans might be more suitable than others.
For example, if you need a small amount, a microloan could be perfect, whereas larger needs might be best met with a 7(a) loan or a 504 loan.
2. Consider Your Qualifications
Lenders have different eligibility criteria, but here are some general guidelines:
- Credit Score: Most lenders look for a minimum FICO score of 670, though this can vary by lender and loan type. Some might also check your business credit score, particularly if you’re seeking a significant amount.
- Debt-to-Income Ratio: Lenders will assess your debt-to-income (DTI) ratio to see if your business can handle additional debt. Aiming for a DTI around 36% is advisable, but some lenders might accept higher.
- Time in Business: Typically, two years in business is required, especially for loans from traditional banks. However, some lenders, particularly online ones, may consider businesses that have been established for as little as six months.
- Annual Revenue: Minimum revenue requirements usually range from $100,000 to $250,000. This helps lenders gauge your business’s ability to repay the loan.
Check each lender’s specific requirements to see which ones align with your business’s profile. This will save you time and help you focus on the most promising options.
3. Consider Lender Type
Now that you have a clear idea of how much you need and what you qualify for, it’s time to choose a lender type. Each type of lender has its pros and cons:
- Traditional Banks: Known for their stability and low-interest rates, banks are a great choice if you have good credit and a solid business history. However, the application process can be lengthy and stringent.
- Credit Unions: These member-owned institutions often offer favorable terms and interest rates. They might be more flexible than banks, especially if you have a good relationship with them.
- Nonprofits: Some nonprofit organizations offer microloans and other small business loans. These can be a good option if you’re just starting out or need a smaller amount of money.
- Online Lenders: Online lenders can offer fast funding and have more flexible requirements. They are a great choice if you need money quickly or have less-than-perfect credit. However, they might come with higher interest rates.
4. Consider Lender Reputation and Customer Service
The lender’s reputation and customer service can significantly impact your borrowing experience. Researching past and current customer experiences can provide valuable insights:
- Online Reviews: Check platforms like Trustpilot for reviews. Pay attention to recurring themes in both positive and negative feedback.
- Better Business Bureau (BBB): Look for any complaints or government actions against the lender. A pattern of unresolved complaints can be a red flag.
- Word of Mouth: Ask other small business owners about their experiences with various lenders. Personal recommendations can be very insightful.
Customer service is crucial, especially if you encounter issues during the loan term. A lender with good customer service can make the process smoother and less stressful.
5. Consider the Application Process
The application process varies by lender.
Many lenders offer online preapproval or prequalification with a soft credit check that won’t impact your credit score.
This initial step allows you to view potential loan offers, including terms, interest rates, and monthly payments.
If you decide to move forward or if prequalification isn’t an option, a hard credit inquiry will be conducted, which can temporarily lower your credit score.
To expedite the process, gather all necessary documents before applying.
Common documents include financial statements, tax returns, and business licenses.
Online lenders typically provide a decision quickly, often within minutes or the same business day.
Traditional lenders, such as banks, might take a few days to review your application.
After submitting your application, you’ll receive a decision or a request for additional information.
Once approved, review and sign the loan documents, and the lender will disburse the funds.
Questions To Ask Your Potential Lender
Before finalizing your decision, ask these important questions:
- Do you lend to businesses in my industry?
- What documents will you need from me?
- What are the interest rates and total costs?
- How long will the loan application process take?
- What is your payment plan?
- What will my payment schedule be?
- If approved, when is my first payment due?
- Does the loan require a personal guarantee or collateral?
- Do you report my credit history to business credit bureaus?
- Do you have any customer testimonials I can read?
These questions will help you understand what to expect and ensure there are no surprises down the road.
How To Pick The Right Lender For Your Small Business: Final Thoughts
Not all business lenders are created equal. Take the time to explore your options and understand your unique needs.
Get prequalified with at least three lenders to ensure you secure the best financing deal for your business.
By doing so, you’ll be well on your way to finding the perfect loan to fuel your business growth.
Choosing the right lender can make a significant difference in the success of your business financing.
By considering your needs, qualifications, the type of lender, their reputation, and the application process, you can make a well-informed decision.
Remember, the goal is not just to get a loan, but to get the best loan for your business.