How to choose the best small business loan for your needs

business money

Starting a small business is expensive, and so is expanding one.

Now, regardless of the phase you are in your business cycle, whether startup or growth, a small business loan can help to boost the operations of your business.

However, choosing the best small business loan for your needs is not a straightforward affair.

It’s for this reason we’ve created this detailed guide that outlines the methods and tips you should consider when choosing the best small business loan.

Evaluate Whether You Need Financing

First thing first, you need to determine whether you need a loan.

The availability of credit options does not really necessitate you taking a loan for your small business.

Before you think of taking a loan, you need to assess whether your business really needs financing.

According to Jared, a Co-founder and CEO,Fundera, there are various reasons your small business requires financing, but we shall highlight the three crucial factors.

These include;

Cash Flow Shortage

At times, income and expenses aren’t timed well. For instance, you might have to pay your workers every two weeks, but your next invoice is due in one month. In such instances, where the business is growing healthily, you’re at liberty of taking a loan.

However, if you’re struggling to makes sales in the first place, you should not consider taking a loan, but rather focus on fixing on how to increase sales.

Large Purchases that Will Boost New Growth

You need money to make more money.

However, like our case above, don’t take a loan to increase your inventory, if your business is growing.

Instead, take this bold step when you’re sure your business is already healthy, and adding more goods will only but drive more growth.


Running a small business has its ups and downs.

At times, equipment breaks down, or the employees make critical mistakes.

Either way, if any unplanned expense risks the lifeblood of your business, taking a loan would be of the essence.


The next step is to evaluate your business and try to figure out how the lender sees you.

Knowing your personal and business credit scores will ultimately give you an idea of whether you qualify for a loan and how much you do.

The debt-equity-ratio, in particular, will help you determine your credit scores.

A higher score usually translates to better rates and, consequently, better repayment terms.

Choosing a Lender

Your choice of lender will be hugely dependent on your business needs.

For instance, if you’re looking for invoice financing, you can try to compare between business loan providers that offer invoice loans. On the other hand, if you have sufficient credit scores for a traditional financial institution, you can start comparing bank loan options.

During the comparison, look at the loan-specific features such as maximum and minimum loan limits, terms, fees, and APRs.

Loan Amount

When searching for a loan for your small business, you need to have a rough idea of the liquid fund you need.

While at it, you must be realistic and flexible when mentioning the desired loan amount.

In most cases, lenders usually use the records and growth potential of your business to determine the exact loan amount.

The loan amount might play a crucial role in determining the suitability of a lender. For instance, if a lender sanctions a small amount of loan, your needs might not be fulfilled.

Cost of the Loan

When it comes to the cost of the loan, it’s a shame that most people only consider the interest rate rather than the total cost of borrowing.

Now, while the interest rate is a vital component that determines the cost of your loan, you should similarly consider other factors such as APR (fees), documentation fees, application fees, and penalties too.

The Mode of Disbursal

Typically the business loan is availed in two forms;

  • Installment loan
  • Line of credit

Installment loans require the lender to disburse the entire loan amount at once.

On the contrary, the line of credit will revolve around credit. Here, a business owner can withdraw any amount provided they’re within the credit limit.

The mode of disbursal will depend on how and when you need your money.

If, for instance, you need a lump sum to make a large purchase, you’ll need the installment loan. On the other hand, if you need money to pay your workers every month, a line of credit loans might be a more inspired choice.

Repayment Terms

You need to evaluate the repayment terms carefully.

Here, pay close attention to the frequency of repayment and the overall repayment schedule.

Also, inquire whether you can pay off the entire loan, or you’ll have to wait until its maturation.

While some of these details seem like discrete details on the fine print, they can save or cost you hundreds of dollars in the long run.

Understand the Risks of Financing

Even if your enterprise is on a growth trajectory, and you qualify for financing, ensure that you fully weight the benefits of financing against the risks.

Take your time, be patient, and carefully evaluate your options before proceeding with the loan application.