How to Choose a Small Business Loan Lender

Securing funding is often a pivotal step for small businesses, especially for modern businesses in the consumer packaged goods (CPG) and e-commerce sectors. Whether it's for scaling operations, managing cash flow, or launching new products, the right capital infusion can determine the outcome between stagnation and growth.

However, amidst a sea of options, selecting the ideal small business loan lender can be a daunting task. There are lots of factors to consider: From interest rates to repayment terms, making an informed decision is critical for the long-term success of your venture.

In this guide, we'll walk you through the essential considerations when choosing a small business loan lender, with insights that will empower you to navigate the lending landscape with confidence and secure the financing solution that aligns with your needs.

Key Considerations Before Choosing a Small Business Lender

First, let’s look at some key considerations before choosing a lender:

Assess Your Financial Needs

Before looking at all the available lending options, take a step back and evaluate your specific requirements. Are you seeking capital to expand your product line, invest in marketing efforts, or stock up on inventory? Understanding your funding goals will help you narrow down the type of loan that best suits your business.

Evaluate Your Business’s Financial Health

Once you apply, lenders will scrutinize your business’s financial standing before offering a loan. Make sure your revenue projections, inventory & A/R,  cash flow, and other metrics are all in good shape, so lender’s can gauge your eligibility for financing. By understanding your financial strengths and weaknesses, you can identify lenders that align strongly with your business.

Understand the Different Types of Lending Options

With so many lending options to choose from, conducting thorough research is crucial. From traditional banks to alternative lenders, it is important to understand the differences between their funding options and choose accordingly. Consider factors such as interest rates, repayment terms, and eligibility criteria to shortlist potential lenders that match your preferences.

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Factors to Keep in Mind When Selecting a Small Business Lender

Here are some important factors to consider when evaluating lenders.

Interest Rates and Loan Terms

Interest rates represent the cost of borrowing money and play an important role in determining the affordability of a loan. When evaluating potential lenders, it's essential to compare their interest rates to identify the most competitive offers. Keep in mind that interest rates can vary based on factors such as the lender's assessment of risk, prevailing market conditions, and the type of loan product.

Lenders may offer loans with either fixed or variable interest rates, each with its own set of pros and cons.

Fixed Rates: With a fixed-rate loan, the interest rate remains constant throughout the loan term, providing predictability and stability in repayment. This can be advantageous in a rising interest rate environment, as borrowers are safe from fluctuations in the market. However, fixed-rate loans may initially come with higher interest rates compared to variable-rate options.

Variable Rates: Conversely, variable-rate loans are tied to an underlying benchmark, such as the prime rate or LIBOR, and can fluctuate over time in response to changes in market conditions. While variable rates may start lower than fixed rates, they expose borrowers to the risk of rising interest expenses if market rates increase. However, in a declining rate environment, borrowers may benefit from lower interest costs.

Considerations of Fees: When evaluating loan offers, don't overlook the impact of fees on the overall cost of borrowing. While a lower interest rate may seem enticing, it's important to factor in any associated fees, such as origination fees, processing fees, or prepayment penalties. A loan with a slightly higher interest rate but lower fees may ultimately result in lower total repayment compared to a loan with a lower interest rate but hefty fees.

Reputation and Customer Service

For lenders, reputation and customer service are invaluable currencies that can make or break the borrowing experience. Before trusting a lender, it is important to assess their reputation in the industry, portfolio, and the  quality of customer service.

Research Lender Reviews and Ratings: One of the most reliable ways to check a lender's reputation is by looking into customer reviews and ratings. Various platforms provide insights into the experiences of past borrowers, offering a chance to learn more about the lender's reliability, transparency, and overall satisfaction level. Pay attention to recurring themes and sentiments expressed in reviews to form a comprehensive understanding of the lender's reputation. In some cases, you may also reach out to current client brands and learn more about their experience with a specific lender.

Simplified Loan Process: Good customer service goes beyond mere politeness — it can streamline the loan process and alleviate the complexities associated with borrowing. From the initial inquiry stage to the final disbursement of funds, responsive and knowledgeable customer service representatives can guide you through each step, clarify any uncertainties, and expedite decision-making. This level of support not only saves time and effort, but also instills confidence and peace of mind throughout the lending journey.

Better Post-Loan Support: The relationship with your lender doesn't end once the funds are disbursed — ongoing post-loan support is just as important. Whether you encounter challenges with repayment, require additional funding, or seek financial guidance, reliable lenders can be a lifeline for your business. Choose a partner that remains accessible and supportive even after the loan has been secured, offering assistance and solutions tailored to your evolving needs!

Application Process and Approval Time

The road towards securing financing begins with the application process. Understanding the steps involved and the typical approval timeline is essential for aligning your financing needs with the lender’s capabilities. Here are a few reasons as to why the application process and approval time matter.

Understand the Steps Involved: Before applying, it's crucial to have a clear understanding of the steps involved in the process. From gathering documentation to submitting the application and undergoing underwriting, each stage plays a vital role in determining the likelihood of loan approval. Familiarize yourself with the lender's specific requirements and procedures to streamline the application process and maximize your chances of success.

Consider the Approval Timeframe: Time is money. Whether you're facing unexpected expenses, taking advantage of growth opportunities, or addressing cash flow issues, the speed at which funds are approved and disbursed can make a world of difference. Understand the typical approval time frame offered by lenders and consider how it aligns with your urgency for accessing funds. Some lenders may boast expedited approval processes, while others may adhere to more stringent timelines.

Importance of Quick Approval and Funding: In certain scenarios, such as emergency expenses or time-sensitive growth initiatives, quick approval and funding can be game-changers for emerging businesses. Opting for a lender that prioritizes efficiency and agility in the approval process can provide peace of mind and ensure that you seize opportunities without delay. Whether it's same-day approval or accelerated funding timelines, prioritize lenders that offer fast turnaround times to address your pressing financial requirements.

Steps to Take When Choosing a Lender

Here’s a step-by-step breakdown of the selection process:

1. Research and Identify Potential Lenders: Create a comprehensive list of potential lenders, including both traditional banks and alternative financing options. Include online lenders, credit unions, and specialty lenders that cater to your industry.

2. Compare Loan Options and Terms: Analyze loan products and their conditions, such as interest rates, fees, and repayment schedules. Use a comparison chart to evaluate different lenders' offerings side by side.

3. Check Eligibility Requirements: Review each lender's minimum eligibility criteria to ensure your business qualifies. Highlight common requirements such as minimum revenue, time in business, and credit score.

4. Read Reviews and Seek Recommendations: Look for testimonials from other businesses and ask for recommendations from peers or financial advisors. Consider reviews from businesses similar to yours to gauge relevant experiences.

5. Visit or Contact Lenders for Clarifications: Schedule meetings or calls with shortlisted lenders to ask specific questions and get detailed information. Prepare a list of questions regarding fees, terms, and the application process.

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Questions to Ask Potential Lenders

Before deciding on a lending partner, it is important to also find out if there are hidden fees, assess the lender’s flexibility, and also fully understand the loan terms. Here's a comprehensive list of questions to ask when evaluating lending options, ensuring that you make an informed decision that aligns with your financial goals and preferences.

1. Hidden Fees and Charges:

Are there any hidden fees or charges associated with the loan?

What fees should I anticipate beyond the stated interest rate?

Can you provide a breakdown of all potential fees throughout the loan term?

2. Flexibility of Loan Terms:

How flexible are the loan terms in terms of repayment schedule and loan duration?

Are there options to customize repayment schedules to align with cash flow fluctuations?

Can the loan terms be adjusted or renegotiated based on changing business needs?

3. Early Repayment Options:

Are there penalties for paying off the loan early?

What options are available for early repayment, and how do they impact the total cost of borrowing?

Can I make additional payments towards the principal without incurring penalties?

4. Impact of Prepayment Penalties:

Do prepayment penalties apply if I decide to pay off the loan ahead of schedule?

How are prepayment penalties calculated, and what factors influence their applicability?

Are there scenarios where prepayment penalties may be waived or reduced?

5. Origination Fees and Annual Fees:

Are there any origination fees associated with initiating the loan?

Do you charge annual fees or maintenance fees for servicing the loan?

Can origination fees or annual fees be negotiated or waived under certain circumstances?

Asking the right questions is instrumental in understanding the intricacies of small business lending and uncovering the true cost and terms of financing. By inquiring about hidden fees, assessing the flexibility of loan terms, understanding early repayment options, and understanding the impact of prepayment penalties, you can gain clarity and confidence during your borrowing journey.

Final Thoughts

As you navigate the complex world of small business lending, equipped with insights and considerations, it's crucial to distill key points and chart a course towards informed decision-making. Here's a recap of essential takeaways and closing advice to guide you on your financing journey:

1. Prioritize Professional Financial Advice

Complex financial decisions warrant professional guidance. Consider consulting with a financial advisor to review loan offers, decipher terms, and assess the implications for your business's financial health. A seasoned advisor can offer tailored insights and strategic recommendations to steer you towards optimal financing solutions.

2. Embrace Ongoing Financial Review

The financial landscape is dynamic, and your business's needs may evolve over time. Stay proactive by regularly reviewing your business's financial health and assessing the performance of existing loans. Be open to refinancing or exploring new loan options that better align with your current objectives and circumstances.

3. Cultivate a Culture of Financial Vigilance

Set a cadence for regular check-ins to evaluate your financial situation and loan performance. Whether it's monthly, quarterly, or annually, these assessments provide valuable opportunities to course-correct, capitalize on emerging opportunities, and safeguard against potential risks.

In closing, the journey towards securing a small business loan is not merely a transaction — it's a strategic endeavor that demands diligence, foresight, and collaboration. By leveraging professional financial advice, embracing ongoing financial review, and fostering a culture of financial vigilance, you can navigate the lending landscape with confidence and position your business for sustained growth and success.

Remember, the right financing partner is more than just a lender—they're a trusted ally invested in your business's prosperity. Choose wisely, stay vigilant, and embark on your entrepreneurial journey with clarity and conviction.

Assembled Brands is the leading CPG lender for today's top consumer brands. Learn more about how we fuel growth through our flexible financing solutions.