Small business loans offer numerous benefits, including the ability to finance projects, acquire equipment, and obtain working capital when cash flow is insufficient. But, there are disadvantages to borrowing money, including the possibility that you would default on your payments and lose whatever collateral you put up.
5 TYPES OF SMALL BUSINESS LOANS
| 1. | Term loans |
| 2. | SBA loans |
| 3. | Business lines of credit |
| 4. | Equipment loans |
| 5. | Invoice financing |
Read on to determine if obtaining a small business loan is the best option for your firm. Following, we examine the advantages and disadvantages of small company financing.
The advantages of small business loans
There are numerous advantages to obtaining a small company loan. Here are some points to consider.
1) Accelerate Your Company’s Development
A business loan can spark your company’s growth if used appropriately. The funding from a company loan can allow you to implement your goals sooner, rather than waiting until your business generates sufficient profit to sustain expansion on its own.
2) You Don’t Have to Dilute Your Equity
A business loan enables you to obtain a cash infusion without attracting investors. This allows you to maintain complete control of your firm and retain all profits as it expands.
After you accept an investor, he or she will receive a portion of your revenues for as long as your business is operational. In contrast, a loan is a temporary solution. After repayment, you will have no more obligations to the lender.
3) Resolve Cash Flow Problems
Each small firm can experience a cash flow shortfall. This is especially typical when a small firm experiences quick expansion, as you may need to hire additional staff and/or purchase additional equipment and materials before receiving payment. These ripples can be smoothed out by the use of a loan.
4) Use Flexibility of the Funds
If you obtain funding from an investor, it is possible that the investor may have a role in how you spend the money and may impose restrictions on what you can and cannot do with it.
As long as the loan is not explicitly for company equipment or real estate, there are normally no restrictions on how the money can be used when borrowed from a lender.
5) May be less expensive than other borrowing options.
Using credit cards, an overdraft, or a personal loan to get the money you need can frequently be more expensive than using a business loan.
This is especially true if your firm has been operating for several years and has a solid credit score, or if you opt for a secured loan (meaning you put up collateral), as both of these factors can help you obtain a cheap interest rate.
Negative Aspects of Small-Business Financing
While there are numerous advantages to business loans, there are also possible disadvantages. Consider these factors before making your ultimate decision.
1) Protracted Application Procedure
Because lenders issue commercial finance based on your company’s potential to repay, they will normally request a substantial amount of documentation during the application process.
In addition to filling out an application, you will likely be required to submit two or three years of tax returns, financial statements, and a business plan.
2) If you default on your payments, you could lose assets.
To protect the security of their investment, many financial institutions demand business owners provide collateral in the event of nonpayment. If you pledge a business asset as collateral, you risk losing it if you fail to repay the loan.
In certain circumstances, new business owners must utilize personal assets (such as a home) as collateral. In such a situation, you risk losing your home.
3) You Must Have a Solid Credit Report
Interest rates are often determined by your credit score, both your personal score and your business’s score. Even though banks often offer lower interest rates than alternative funding choices, it is not always simple to qualify for these favorable rates.
If your credit score is below average, you may end up paying more than you would like for the loan.
4) You Might Not Get the Money for Some While.
The underwriting process for business loans is often lengthier than for other types of loans. For the highly desirable SBA loans (which are backed by the U.S. Small Business Administration), approval and funding from the lender can take several months. If your company has an urgent need for cash, a business loan may not be the greatest solution.
5) Inflexibility Regarding Repayments
The terms of the majority of commercial business loans are not adjustable. You will borrow a fixed amount of money, make predetermined monthly payments, and be required to repay the loan within a specified time limit. If the revenue of your small business fluctuates frequently, a monthly payment may not be optimal.
Comparing Advantages and Cons
As you can see, there are numerous advantages and downsides to business loans, thus the most important question to ask is how you will use the money.
Even more so, it may be prudent to draft a business strategy outlining how you would use the loan funds and how you expect the money to increase profits. This is advantageous since you will be able to utilize this company plan when applying for a business loan.
FREQUENTLY ASKED QUESTIONS
Small business loans offer numerous benefits, including the ability to finance projects, acquire equipment, and obtain working capital when cash flow is insufficient. But, there are disadvantages to borrowing money, including the possibility that you would default on your payments and lose whatever collateral you put up.
1. Term loans
2. SBA loans
3. Business lines of credit
4. Equipment loans
5. Invoice financing