Learn to Compare Business Loans for a Profitable Growth

Learn to Compare Business Loans for a Profitable Growth

Compare Business Loans

Many businesses considering finance want to compare business loans to see what’s available to them. There are lots of ways to do this, which we’ll cover, but there are also many other types of lending to think about, which could be a better fit for your business.

If cash flow or working capital is the issue you want to solve, it might also be worth considering various forms of working capital finance like invoice finance, merchant cash advances, and revolving credit facilities.

The Total Cost of Finance

One of the most obvious ways to compare business loans is by looking at interest rates. But this may actually be more hindrance than a help because interest rates are only one part of the equation.

It’s important to realize that the interest rate, the amount, the term, and other secondary factors like setup fees and early repayment fees all add up to the total cost of finance.

It might sound counterintuitive, but it sometimes makes sense to choose a higher interest rate because of all the other factors. For example, let’s look at four different scenarios for a loan of USD 25,000:-

Comparing Business Loans

Loan amount Interest rate Term length Total cost Monthly payment
1 USD 25,000 10% 12 months USD 26,375 USD 2,198
2 USD 25,000 10% 24 months USD 27,687 USD 1,154
3 USD 25,000 15% 12 months USD 27,077 USD 2,256
4 USD 25,000 15% 24 months USD 29,092 USD 1,212

As you can see, it’s not just the interest rate that matters. When we change the term length, the monthly payment changes dramatically, even with the loan amount and interest rate staying the same.

It’s also worth noting that the term length and monthly payment are probably more important here than the total cost of finance, which doesn’t vary nearly as much between the four examples.

In fact, it would be entirely reasonable to choose option 4 over option 1, because although the total cost is almost USD 3,000 higher, you get a much smaller monthly payment and keep the money for twice as long.

All of the above examples were created using our business loan calculator — why not try it yourself?

Security

This is the other key question for a company looking to compare loans. Almost every kind of business finance is based on something — whether it’s explicitly secured lending or not — so you need to make sure you match up your needs with a suitable type of lending.

For example, getting a large unsecured loan for a low-turnover or early-stage business will be next to impossible without some valuable assets as security or a personal guarantee — and not everyone is willing to offer those.

On the other hand, if a company issues large invoices to other businesses, factoring or another type of invoice finance is the logical way to get funding — and a term loan might not be the best option.


Must Read: Don’t Apply for Business Loan Before Knowing These Things


Term length

Many of the lenders we work with offer different products depending on the length of the loan term. A general rule of thumb when you compare loans: the longer the term and the higher the amount borrowed, the more interest you’ll pay, and the harder it will be to secure. So it makes sense to think about the best- and worst-case scenarios of what you’ll do with the money, and determine the best course of action.

Maybe what’s right for your business is choosing a small short-term loan, seeing how things go, and applying for a second facility at a later date — rather than committing to a larger amount and taking on more risk.

It also pays to look into the lending thresholds lenders have — for example, if you’re looking for USD 20,000 and the lender’s boundary between a cheaper and more expensive rate of interest is USD 15,000, consider whether that extra USD 5,000 is worth it.

Other factors

1. Speed

Many lenders can supply funds within a couple of days if they have the right information and your firm is suitable — whereas more complex deals can take a week or two to arrange.

2. Flexibility

Some loans have early repayment fees, which means if things go well and you can pay off the loan earlier than agreed, it’s not in your financial interest to do so. There are many other small differences between loans like this, including fixed or variable interest rates, which will make a difference to your business’s future if your projections aren’t that clear.

Often, lenders will offer a drawdown facility, giving you a maximum borrowing amount that you can use as required. This can be a huge advantage for seasonal businesses because you only pay for what you need to borrow, rather than taking the whole sum at the start of the term.

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