Apples vs Oranges: How to Compare Business Loans

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For one reason or the other loans are sometimes needed by business owners for financing their business operations or expansions. However, there are so many things to consider before deciding which loan is right for you. To assist you with your decision you may have to consult  your accountant, business experts or other credit professionals like FundingHub in order to make the right decision. Again, they will need to compare different business loans, understand the pros and cons of each, and choose the one suitable for your business.

For instance, if working capital is the reason why you want a loan as a business owner in South Africa, you may need to compare different kinds of available working capital finance, such as a merchant or business cash advance, debtor finance, or a revolving credit facility. Comparing these will not only help you narrow down your options, but also to choose the best one for your business need. The guide below will shed more light on what to do.

How to Compare Different Business Loan Options

To start with, for you to compare and contrast different business loans, you need to understand the conditions attached to each. Among other things, some variables to note include:

  • Total cost of finance (interest and possibly fees)

  • Term of the loan

  • The type of business loan (secured or unsecured)

  • Type of interest rate (fixed or variable interest)

  • Interest rate vs fees

  • Repayment frequency eg, daily, weekly, monthly

 What you need to compare are:

1. Cost of Finance

An obvious way to compare different loan options is to look at the interest rates and fees. It's important to know that the loan amount, the actual interest rate, the term, and other sundry factors like early repayment fees and setup fees all contribute to determine what you will eventually repay.

As you can see, it's not only the interest rate that matters, as some people erroneously believe, but also the other variables. That's why even a high interest rate may eventually be better for your business' needs. This may sound counter intuitive, but it's actually true!

 2. Term of the Loan

 Banks and alternative lenders offer different finance options depending on the length of the repayment term. As a general rule of thumb for comparing loans, however: the longer the loan term and the larger the borrowed amount, the better the lending rate should be. As a consequence, it's better to do your calculations and compare each option to choose the best course of action.

3. Speed of Approval

Banks could take a couple of weeks to grant and transfer your loan to your business account, while some credible alternative lenders do so within a few business days, provided all the necessary information is supplied and your company meets basic requirements. More complex loan deals generally take more time, however.

4. Interest Rate vs. Other Fees

Interest rate and other secondary fees are the other important things to consider in choosing a loan deal that suits your needs. The rates could be charged in different ways. For example, while some lenders use a factor rate based on the loan amount, others use a fixed rate based on the total amount owed.

In addition, different loan options come with different fees. Some loan applications may feature fees like document fees, service fees, and account-keeping fees, which will add up to increase the amount to be repaid. 

5. Flexibility

Some loan deals have clauses stipulating early repayment fees.  As a result, it'll cost you a price if you decide to pay off the loan earlier than scheduled. There could also be other minor differences with fixed or variable interest rates, which could make quite a difference to your business finance, if the terms aren't clear to you.

The Bottom Line

From the above, it can seen that a business owner needs to make a careful comparison of available loan deals in order to choose the best one.

For best result, it's advisable to consult a lawyer, a business advisor, or a credible business loan market place like FundingHub. FundingHub remains the best platform in South Africa for providing SMEs with finance and funding options. In the FundingHub marketplace, business owners are free to compare and choose between 25 of the best loan sources in the nation.