When small business owners start looking for business loans or business funding, they usually focus on one thing — getting approved. But the most important question is not whether you can get a loan. The most important question is whether it is the right type of business loan for your business.
There are many types of small business loans available today including SBA loans, term loans, business lines of credit, equipment financing, and merchant cash advances. Some of these can help your business grow, and some can create cash flow problems if you are not careful.
I often tell business owners there are really two kinds of business loans: the ones that grow your business and the ones that trap your business. The tricky part is they can look very similar when you are signing the paperwork.
Two loans may both offer the same amount of money. Two loans may both have payments that look affordable. Two loans may both get approved quickly. But the total cost of the loan and the repayment structure can be completely different depending on the type of business financing.
Before taking any small business loan or business funding, there are a few things every business owner should understand.
How long the loan term is
If payments are weekly or monthly
The total payback amount
Interest rate versus factor rate
Whether there are prepayment penalties
One of the biggest mistakes I see business owners make when choosing business financing is focusing only on the payment amount instead of the total payback amount. Always look at the total payback, not just the payment.
A smaller payment over a longer term loan can sometimes cost less overall. A larger payment over a short-term loan can sometimes cost much more. It is not always what people expect when comparing business loans.
Another important thing to watch is how often payments are made. Many traditional small business loans like SBA loans, term loans, and business lines of credit have monthly payments. Some alternative financing and merchant cash advance loans require weekly or even daily payments, which can put a lot of pressure on business cash flow.
This does not mean all business loans are bad. SBA loans, traditional term loans, equipment loans, and business lines of credit are often very helpful tools when used correctly. The key is making sure the business loan fits the business and not just taking the first business funding that is offered.
If you run a business, learning how small business loans and business financing work can save you thousands of dollars and a lot of stress. Before you borrow money for your business, it is always a good idea to review your financials, cash flow, and loan options carefully.
Sometimes the right business loan can help a business grow. The wrong business loan can make a hard situation even harder. Make sure you know which type of business funding you are signing.
If you are looking at business funding or a business loan through Sandbar and want someone to help you understand the terms, payments, and total cost before you sign anything, I offer loan review and financial review services for small business owners.
Sometimes the difference between a good loan and a bad loan is just understanding the numbers before you sign the paperwork.
You can contact me at Elise@A-Bears.com for more information.
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