Key Qualities to Look for When Choosing Between Business Loan Companies

In this article, you will learn:

The benefits of a business loan
The 5 C’s lenders use to evaluate borrowers
What to look for in a business loan
Types of business loans

Many entrepreneurs don’t fully realize what a business loan involves until they’re in the middle of applying for financing. And that’s typically when they start wishing they had done their homework ahead of time!

Some business loan companies have lengthy and stringent loan processes and aren’t always the right fit for your business needs. Unfortunately, if you don’t learn this until you’re halfway through the application process, it could cause you a big headache and delay getting started on your business plan. In the meantime, your small business or startup could lose out on a great opportunity. So, what are some key qualities to look for when choosing between loan companies?

Let’s find out.

What are the benefits of a business loan?

The obvious benefit of a business loan is that it helps fund a specific need for your business.

For example, a commercial real estate loan can help you buy the perfect property from which to run your business. You might already operate a thriving business on one end of town but realize there is an underserved area on the other side of town. The right real estate opportunity comes along to help realize the vision of opening a second location. All you need is the capital to make it happen.

Or maybe you have a heavy equipment rental business and want the latest models to put in your showroom. An equipment loan can give you the funds to expand your offerings.

Maybe you just need some cash to get through a tough seasonal lull in your business. A working capital loan can help fulfill that need.

You also might want quick cash at your disposal to facilitate ongoing business needs. A business line of credit would be perfect for that.

But there are other benefits to business loans as well.

You remain in control of your business.

Some small business owners rely on outside investors to fund their ventures. The downside to this is that you no longer have a full stake in your own company. But with a small business loan, you retain control over your business while getting the funding you need to grow your business. Retaining 100% ownership also means you keep 100% of the profits.

There are tax benefits to obtaining a business loan.

Typically, the interest you pay on a business loan is tax-deductible. Of course, you’ll want to check with your CPA to ensure that the type of loan you’re applying for will qualify as a tax deduction. There may also be a limit to how much interest you can deduct.

A business loan helps you build your business credit.

Small business owners usually need funding many times over the course of running their business. A business loan will help you build and improve your creditworthiness every time you take out a loan and pay it in a timely manner. As your credit score improves, this will help you secure future loans at better terms and lower interest rates.

What are the 5 C’s that business loan companies use to evaluate borrowers?

Business loan companies use different criteria when it comes to evaluating borrowers. Most lenders use the 5 C’s of credit when considering whether or not they will approve a business loan.

Character relates to how well you have handled your debt in the past. Your personal and business credit reports will illustrate this in detail by showing how much you have borrowed and paid and how much you owe. It will also outline any delinquent payments, bankruptcies, or foreclosures. Regarding credit scores, every lender has its own minimum requirements. The higher your credit score, the more likely a lender will loan you money. But some lenders, like Biz2Credit, have lower minimum credit score requirements, which can help you get the funding you need while improving your credit for future loans.
A lender will want to know how you plan to use your business loan funds before loaning you money. They will evaluate your business’s industry and the current economy to help them understand how your business is likely to do over time and how risky it is for them to loan you money.
Capacity helps a lender evaluate your ability to pay back a business loan. They will look at certain metrics and compare your income or revenue to the amount of debt you have.
Collateral is usually required for a secured loan. It is something you offer as security for a loan in case you default on the loan.
Some lenders prefer borrowers who are willing to risk some of their own money when funding a business venture. The more of your own capital that you use, the lower the interest rate a lender is likely to give you.

Together, the five C’s will help a lender evaluate your creditworthiness and the level of risk associated with loaning you money.

What should I look for in a business loan?

There are two primary considerations when applying for a business loan. The first is choosing the right type of business loan product, and the second is choosing the best business loan provider for your needs.

But, before you can figure those things out, you need to assess a few things from your end. There are some questions you may want to pose before figuring out the best business loan for your business.

How will I use my business loan?
Do I have a good business plan as well as tax returns and financial statements ready to submit to a lender?
How much money will I need?
Do I need a short term or a long term loan?
How long have I been operating my business?
How much can I pay on a business loan each month?
What is my credit score? Do I have a good track record of paying my bills on time?
What shape is my business in? Is it struggling? Does it have a good cash flow?
Do I have collateral for a loan if it’s required?
How much is my outstanding debt?

The answers to these questions will help determine the types of business loans you can qualify for while narrowing the focus on which lenders are more likely to approve financing for your business.

Speaking of lenders, there are three primary funding options when it comes to small business lenders.

Alternative lenders

Alternative lenders and online business loan marketplaces, such as Biz2Credit, have become increasingly popular. One reason for this is their seamless loan process and high approval rate. More than 60% of business owners who seek financing with an alternative lender are likely to be approved for funding.

Online lenders are an especially good loan option if your credit history is less than stellar, or you need funding right away. Biz2Credit, for instance, often has cash in hand to its borrowers within 48 hours.

In some cases, a lending marketplace will have interest rates that are very close to what a traditional lender will offer. On the other hand, some online lenders have excessively high rates, so you’ll want to carefully evaluate which lender you choose.

Types of alternative loan financing

Term loans: A term loan offers financing upfront for a lump sum of money, and you make monthly payments with interest over a specified schedule. A term loan can finance a specific business investment, such as purchasing real estate or remodeling existing real estate, acquiring a business, or expanding another business. It can also be used when a business owner has a long-term need for working capital.
Equipment financing: An equipment loan offers you financing for office equipment, tools, machinery, and business vehicles. Equipment loans are easier to get because your equipment purchases are used as collateral for the loan.
Business lines of credit: A line of credit can help you with your business’s daily cash flow needs. With a business line of credit, a lender grants you a ceiling of credit and you only pay interest on the amount of credit you use.
Working capital loans: This is a short-term loan that can be used to fund your business’s operations. Working capital loans often have shorter repayment periods than other types of business financing.
Merchant cash advance: This type of business financing allows you to receive a cash advance equal to up to 125% of the volume of your credit card transactions each month. Merchant cash advances are easy to get, even when your credit isn’t great. But the interest rate is higher than with other types of business financing and can vary greatly, depending on the lender.
Franchise loans: A franchise loan can be used to open your own franchise, or for working capital, equipment purchases, and building of storefronts or restaurant businesses that are part of a franchise.
Invoice factoring: With this type of funding, a small business can receive money for outstanding or unpaid invoices. This allows you to get upfront funding to use as needed.

Traditional financial institutions or banks

Traditional lenders want to see really good credit when considering financing a business loan. Because of this, only about one-quarter of small business owners are approved for commercial funding from a traditional lender or bank.

But if you can be one of those one-in-four business owners to get commercial financing with a bank, their interest rates are typically lower.

Traditional lenders usually have shorter payback times than SBA loans too. And while a bank is likely to process your business loan application faster than the SBA, it still takes much longer than it does with an alternative lender to find out if you’re approved for your business loan.

Types of traditional bank loans

Term loans
Equipment loans
Business line of credit
Business credit card

Small Business Administration lenders

The Small Business Administration partners with banks, credit unions, and microlenders in offering loan programs to small business owners. Depending on which loan program you go with, the SBA guarantees from 75% to 90% of the loan.

SBA loans are a good option for small business owners who want more favorable repayment terms than a traditional bank alone offers.

However, there is an inordinate amount of paperwork that must be completed during the loan application process, even more so than with a traditional bank, and the loan process can take months.

Even then, you won’t know for quite a while if you’re even approved for the loan. The SBA is quite strict with its lending guidelines, so it’s challenging to receive approval.

If you need fast funding for your business venture, an SBA loan is probably not your best option.

Types of SBA business loans

7(a) Loan Program: The 7(a) loan has a maximum loan amount of $5 million, with up to 10 years to pay back the loan for working capital and up to 25 years for fixed asset purchases, such as inventory, equipment, furniture, and real estate. You can also use a 7(a) loan to expand your existing business or refinance business debt.
SBA Microloan Program: A microloan can be used for purchasing inventory, equipment, furniture, machines, supplies, or fixtures. You cannot use a microloan to pay down your existing debt or buy real estate. The SBA microloan program allows you to borrow up to $50,000 with a maximum repayment period up to six years.
SBA 504 Loan Program: This type of loan can be used toward the purchase of major fixed business assets such as real estate, machinery and equipment with a longer useful life, or refinancing debt when expanding your business. You cannot use a 504 loan for inventory purchases or for working capital. You can borrow up to $5.5 million and take between 10 and 20 years to pay back a 504 loan. You may be required to come up with a 10% downpayment.

Final Thoughts on the Key Qualities to Look for When Choosing Between Loan Companies

When choosing between business loan companies, the best option is often the one with the traits you need in a lender – flexibility, ease of lending, and fast approval and funding. That often means an alternative lender that offers you funding when you need it rather than the way traditional lenders tend to operate, which is on their timeline.

Biz2Credit has facilitated commercial loans for 15 years and has the key qualities business owners seek when searching for a business loan company.

Biz2Credit client Deepak Verma’s advice to business owners is to work with a lender that you can trust. He said that his Biz2Credit case manager was willing to work with him all weekend to get his business deal done and help Deepak see his acquisition of a car wash business become a reality.