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How to Choose the Best Small Business Loan for Your Needs

How to Choose the Best Small Business Loan for Your Needs

Starting a business can be expensive, and so can expanding one. No matter where you are in your business’s life cycle, from startup to growth, a business loan can help get you started or address specific needs along the way.

A 2019 survey by a group of Federal Reserve banks explored the state of small business credit, finding that 43 percent of small business seek external funds and seven in 10 small employer firms carry outstanding debt. About 56 percent of respondents applied for loans to expand their businesses, pursue new opportunities or acquire business assets, and 44 percent needed the funding to meet operating expenses. Results also suggested that most small businesses apply to online banks or large lending institutions for these funds, though some use credit unions and other smaller banks.

When considering financing options, it’s important to understand the different types of loans available to small businesses so you can select the best option for your needs.

Term loans

Term loans, also known as long-term loans, are best for business owners with great credit who are requesting a lot of funding. They may not be a good option if you’re starting a new business, since lenders often want to see a track record of success before taking on risk.

The term loan application process is lengthy, and large banks reportedly approve about 25 percent of small business loans. If your application is accepted, you’ll pay a principal amount plus interest each month until your debt is paid in full. Term loans are most often used to buy real estate, acquire another business, remodel or renovate a commercial space or support long-term business expansion.

Short-term loans

Short-term business loans provide fast cash for people aiming to bridge cash flow gaps, address emergencies, pay off higher-interest debt or take advantage of new business opportunities.