Comparing different business finance options
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Searching for small business financing can feel intimidating and overwhelming. Business owners have a lot of options in terms of financing solutions, and each has its own requirements and criteria depending on the type of financing you choose. Rates vary broadly as well. Several businesses considering outside funding would want to compare business loans to see what's available to them. Various lenders may offer different rates. Always look for the best deal, and keep an eye out for hidden fees. There are lots of ways to do this, which we'll cover, but there are also many other lending options to think about, which could be suitable for your business. If shortage of cash or working capital is the problem you want to solve, it might also be worth considering different forms of working capital finance like merchant cash advances, invoice finance, and revolving credit facilities. Cost of finance
The most obvious way to compare business loans is by checking at interest rates. But this may generally be more hindrance than a help because interest rates are only one part of the equation.
It's important to understand that the interest rate, the term, the amount and other secondary aspects like setup fees and advance repayment fees all add up to the total cost of finance.
It might sound strange, but it sometimes makes sense to choose a higher interest rate because of all the differences. For example, let's look at four different scenarios for a loan of $25,000.
Comparing business loans
As you may know, it's not just the interest rate that matters. When we change the length of the payment term, the monthly payment changes dramatically, even if the loan amount and interest rate stays the same.
It's also worth seeing that the term length and monthly payment are likely more important here than the total cost of finance, which doesn't vary closely as much between the four examples.
Actually, it would be completely reasonable to choose option 4 over option 1, because even though the total cost is almost $3,000 higher, you get a much lesser monthly payment and keep the money for twice as long. Security
This is the other key factor for a company looking to compare loans. Almost every kind of business finance is based on something — whether it's overtly secured lending or not — so you need to make sure you get a suitable type of lending for your needs.
For example, getting a huge amount of unsecured loan for an unstable or startup business will be next to impossible without some valuable assets as security or a personal guarantee — and not everyone is keen to offer those.
Alternatively, if a company issues large invoices to other businesses, factoring or another type of invoice finance is the reasonable way to get funding — and a term loan might not be the best choice.
Term length
A general rule of thumb when you give a comparison to different loans: the longer the term and the higher the amount lent, the more interest you'll pay, and the harder it will be to get. So, it makes sense to ponder on what’s best- and worst-case scenarios of what you'll use the funding for and determine the best way to handle your acquired loans.
Maybe what's needed for your business is choosing a small short-term loan, see how it goes, and apply for a renewal at a later date — rather than committing to a bigger amount and taking on more risk.
It’s also important to look into the lending thresholds lenders have — for example, if you're looking for $20,000 and the lender's limit is between a cheaper and more expensive rate of interest is $15,000, reflect if that extra $5,000 is worth it. Conclusion:
It’s really important to compare and choose the right loan that suits your business needs. If your business has been adversely affected by the pandemic or maybe you're just starting out, we have the solutions for you! Better Call Sal at (332-334-1077).