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14th May 2022

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Maybe you’ve been told by a colleague or friend that you should take out a small business loan, but you’re not quite convinced. After all, you’ll be taking on debt that has to be repaid. So why would you want to take out a loan for your business?

Benefits of Small Business Loans

Small business loans provide a plethora of benefits. First of all, by taking out financing, you don’t give up any control over your company like you might if you brought on investors. You simply borrow the money and repay it over time.

Business loans provide cash when you need it most. You might run a seasonal business where you have less revenue during parts of the year. A loan can steady your cash flow during these periods.

A loan can also help you build credit when you make your monthly payments on time. Down the road, these positive habits can help you raise 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 infusion to buy supplies during slow periods or cover expenses like payroll. Business bank loans can provide that extra cash flow.

Entrepreneurs might have opportunities to grow the business, maybe by acquiring another or buying new equipment at a great price. That takes capital.

You can use a loan to purchase commercial real estate, and there are working capital loans available through the U.S. 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 constructing or renovating a property and don’t know 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 apply for a loan, when is the ideal time?

There are loan programs for businesses at every stage, though know that a startup may have a harder time getting approved by a bank or SBA lender since they typically 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. Because lenders will look at your credit history to determine eligibility, you’ll want to have good credit if you want to qualify for the best rates on term loans. Financial institutions and SBA loan programs may have stricter requirements for credit and annual revenues for loan approval, so find out what they require before applying.

Another time that’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, if not thousands, over the life of your loan.

Another opportunity for taking out a loan is when there are loan programs like there have been during the COVID-19 pandemic. Though these disaster loans aren’t currently available, keep your ear to the ground and take advantage of them if they come up again and you qualify for long-term loans offered by the government.

Pros and Cons of Common Types of Business Loans 

Now that you’re sold on the idea of taking out a loan, let’s look at each type of loan and weigh the pros and cons of each.

Term Loans

Credit unions, banks, and online lenders offer longer-term loans with lower interest rates.

Pros of Term Loans

  • These tend to be the most affordable financing available to small businesses
  • You can generally borrow larger amounts

Cons of Term Loans

  • Application process may take weeks or even months
  • Qualifying may be more challenging than with other loan options

SBA Loans

SBA-approved lenders can help you get a variety of loans backed by the Small Business Administration, including microloans, the SBA 7(a) loan, and the 503 loan program.

Pros of SBA Loans

  • Have low interest rates and long repayment periods
  • May not be as strict as bank loans on eligibility

Cons 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 cash at once, a line of credit gives you access to cash when you need it. It works like a credit card.

Pros of Lines of Credit

  • You only repay what you borrow
  • Doesn’t have an end date like a loan

Cons of Lines of Credit

  • May have fees in addition to interest
  • May require good credit

Short-Term Loans

Alternative lenders offer short-term loans that have to be repaid within a few months. These types of small business loans may have high interest rates and large monthly payments.

Pros of Short-Term Loans

  • You can qualify even with bad credit
  • Applications are short and sweet

Cons 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

Have you landed on the type of small business loan that’s right for your business? Great! Here are some tips to help with the loan application process.

First, carefully read the requirements to apply. Make sure you qualify with your credit scores, time in business, and annual income. If you don’t, find financing options you do qualify for, though know you may pay more in interest. 

If you don’t like the repayment terms you qualify for because of your credit situation, consider waiting a while, paying down debt, and building your credit so you qualify for better offers. Learn how to establish business credit so you can do so smartly.

Also, find out if you are required to make a down payment. Some larger loans require them. If you’re strapped for cash and can’t afford a large down payment, consider lowering the loan amount you request.

If yours is a new business, you certainly have options when it comes to financing, but you’ll pay more. Only you can decide whether the cost of financing is worth having access to the capital. Build a budget for how you’ll use the money and how you’ll repay it. Will a loan of, say $10,000, help you acquire $1,000 a month more in revenue? In that case, you will cover your loan expenses in a little over 10 months.  On the other hand, if you have no visibility into how a high-interest loan can help you increase revenues, you might wait until you can afford lower-priced financing.

Is a Small Business Loan Right for your Business?

Small business owners that carefully think through their decision to take out a loan know that planning ahead for how they’ll use it and finding the financing they qualify for is the best way to grow a business!

This article was originally written on January 13, 2022.

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