What to consider before taking out a small business loan

Small business owners can go out of their way to self-fund their business.

Yet sometimes they will need a loan to help them grow the business or manage operational costs when the business is unstable and financially unresponsive.

Small businesses have fewer options than larger businesses with easy access to financing. Since some loans require personal guarantees, the business owner may sometimes need to put personal assets at risk. For these reasons, borrowing money as a small business owner is a serious decision that needs careful consideration.

Before applying for a loan, business owners should consider the following:

The amount of money you need


Determining the amount of money you need is the first step. It’s not always possible to pinpoint exactly how much you need, but try to be realistic and include any upcoming expenses you may have. Asking too little will mean you will run out and then have to ask for more funding, which will waste your time and slow down your processes. Asking for too much money forces you to pay unnecessary interest.

How soon do you need the funds

In most cases, planning gives you more options and more time to find the loan that’s right for you. If you know you’ll need money in the coming months, it’s best to start researching and applying for a loan a few months in advance. Some loans take longer to approve but may have more favorable terms.

If you need a loan in an emergency, you may have fewer options and be forced to take out a loan with a high interest rate and less favorable terms.

Lender options

Small businesses are not always eligible for business loans from traditional lenders like banks. Conventional lenders generally require a small business to be financially stable and in operation for at least one year before providing financing.

However, other lenders like government programs, nonprofits, and small community banks offer loans specifically designed for small businesses.

Loan options

What you need to know about short term loans

There are different small business loan options, so shop around and pick the one that best suits your needs. Popular loans include:

SBA loans are ideal for small businesses that only need a small amount and don’t qualify for a traditional loan. The average loan is around $13,000 and cannot exceed $50,000. The government backs these loans, but you will need to apply with a lending institution.

Like a credit card, a business line of credit lets you borrow money from the line of credit only when you need it, and you only pay interest on the amount of money you use. When you repay the borrowed money, the line of credit is replenished so you have revolving credit whenever you need it.

Personal loans are versatile, so you can use them for anything, including financing your business. A personal business loan can be a good option if you have a good credit rating.

Many personal loans are available, each with different interest rates and terms that may vary by state. For example, the rate you get for personal loans in Kansas City will be different from the rate you get for the same or similar loan in New York.

Pay attention to the conditions

When you receive loan offers, read the terms carefully and compare them. Pay attention to fees and interest, and make sure you can afford to pay them. Also, look at the payment period and how long you have to pay them.

Some lenders require monthly installments, while others may require you to pay a lump sum. Only sign a loan agreement if you are comfortable with the terms and are sure you can handle the repayments.

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Dorothy H. Lewis