A colleague or friend may have told you that you should take out a small business loan, but you’re not entirely convinced. After all, you will be incurring a debt that will need to be repaid. So why would you want to take out a loan for your business?
Benefits of Small Business Loans
Small business loans offer a plethora of benefits. First, by taking out financing, you are not giving up control of your business like you would if you were bringing in investors. You simply borrow the money and pay it back over time.
Business loans provide cash when you need it most. You can run a seasonal business where you have less income during certain parts of the year. A loan can stabilize your cash flow during these times.
A loan can also help you build credit when you make your monthly payments on time. Later, these positive habits can help you boost your credit scores and qualify for even better financing options.
Ways to Use a Small Business Loan to Benefit Your Business
Sometimes a business needs a cash injection to buy supplies during slow times or to cover expenses such as payroll. Business bank loans can provide that extra cash flow.
Entrepreneurs might have opportunities to expand their business, perhaps by acquiring another one or buying new equipment at a bargain price. It takes capital.
You can use a loan to purchase commercial real estate, and there are working capital loans available from the US Small Business Administration and other lenders specifically for this purpose.
You might even consider a line of credit, which gives you access to capital when you need it. This is ideal if you’re building or renovating a property and aren’t sure how much you’ll need to complete the project.
Essentially, small business loans provide the cash your business needs to survive, thrive, and grow.
When is a small business loan a good idea?
So if you are applying for a loan, when is the ideal time?
There are business loan programs at every stage, but be aware that a startup may have a harder time getting approved by a bank or SBA lender, as they generally want you to have been in business for at least two years.
Ironically, the best time to apply for business financing is when your business is in good shape. Since lenders will look at your credit history to determine your eligibility, you’ll want to have good credit if you want the best rates on term loans. Financial institutions and SBA loan programs may have stricter credit and annual income requirements for loan approval, so find out what they require before applying.
Another time it’s good to get a small business loan is if you can get a lower rate on an existing loan by refinancing. Getting approved for a lower interest rate could give you better repayment terms and help you save hundreds or even thousands over the life of your loan.
Another possibility of taking out a loan is when there are loan programs like there have been during the COVID-19 pandemic. Although these disaster loans are not currently available, keep an ear out and take advantage of them if they come up again and you qualify for long term loans offered by the government.
Advantages and Disadvantages of Common Types of Business Loans
Now that the idea of taking out a loan has convinced you, let’s take a look at each type of loan and weigh the pros and cons of each.
Credit unions, banks, and online lenders offer longer term loans with lower interest rates.
Benefits of Term Loans
- These tend to be the most affordable financing available for small businesses.
- You can usually borrow larger amounts
Disadvantages of term loans
- The application process can take weeks or even months
- Eligibility may be more difficult than with other loan options
SBA-approved lenders can help you obtain a variety of loans backed by the Small Business Administration, including microloans, the SBA 7(a) loan, and the 503 loan program.
Benefits of SBA Loans
- Have low interest rates and long repayment periods
- May not be as strict as bank loans on eligibility
Disadvantages of SBA Loans
- If you have bad credit, you may not qualify
- Application can take weeks or months
Lines of credit
If you don’t want all your money at once, a line of credit gives you access to cash when you need it. It works like a credit card.
Benefits of lines of credit
- You only repay what you borrow
- Has no end date like a loan
Disadvantages of lines of credit
- May have fees in addition to interest
- May require good credit
Short term loan
Alternative lenders offer short-term loans that must be repaid within a few months. These types of small business loans can have high interest rates and large monthly payments.
Advantages of short term loans
- You can qualify even with bad credit
- Requests are short and sweet
Disadvantages of short-term loans
- Interest rates can be exorbitant
- You have less time to repay, so monthly payments may not be affordable
Tips for Applying for a Small Business Loan
First, carefully read the requirements for applying. Make sure you qualify with your credit scores, time spent in business, and annual income. If not, find financing options that you To do right, but be aware that you could pay more interest.
If you don’t like the repayment terms you’re entitled to due to your credit situation, consider waiting a while, paying off your debts, and building your credit to qualify for better deals. Learn how to establish business credit so you can do it smartly.
Also check if you are required to pay a deposit. Some larger loans require this. If you’re short on cash and can’t afford a large down payment, consider reducing the loan amount you’re requesting.
If your business is a new venture, you certainly have options when it comes to financing, but you will pay more. Only you can decide if the cost of financing is worth having access to capital. Set a budget for how you will use the money and how you will pay it back. Will a loan of, say, $10,000 help you earn $1,000 more in income per month? In this case, you will cover your borrowing expenses in just over 10 months. On the other hand, if you have no visibility into how a high-interest loan can help boost your income, you might wait until you can afford lower-cost financing. .
Is a small business loan right for your business?
Small business owners who think carefully about their decision to take out a loan know that planning ahead how they will use it and finding the financing they are entitled to is the best way to grow a business!
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