Small business loans offer multiple advantages, including funding your business’s R&D (research and development), investing in your equipment, and getting working capital when you don’t have enough cash flow. However, taking loans comes with multiple downsides, too, which include the risk of defaulting on your payments and losing any asset you put as collateral. So, in this blog, we will enlighten you about the pros and cons of small business loans.
What is a Business Loan?
A business loan refers to the fund that a business owner borrows from a lender to invest in their business or for other purposes related to the business. Generally, a business term loan is paid off over a set period of time in regular installments, which get deducted from their business account.
Pros of Small Business Loans
- Expedite Your Business’s Growth: A business loan is a wise decision to jumpstart your business’s growth. After all, the funding allows you to execute your plans rather than waiting for your business to make a profit to fund its expansion.
- Do Not Need to Dilute Your Equity: A business loan provides you with funds without bringing more investors on board. So, it allows you to keep full control of your business and retain all the profits as your business grows.
- Overcome Cash Flow Issues: Cash flow issues are common in businesses, particularly in small businesses experiencing rapid growth. In such situations, you will need more employees and/or equipment to boost your productivity, for which you need funds. Taking a loan solves this issue.
- Less Costly Than Other Forms of Borrowing: A business loan can often offer a better value than utilizing credit cards or getting a personal loan. This is especially true when your business has been in operation for a couple of years and has a strong credit product.
Cons of Small Business Loans
- Extensive Application Process: Since lenders provide loans based on your business’s ability to pay, they will usually need extensive paperwork during the application process.
- Need a Strong Credit Profile: Your loan’s interest rates depend on your credit score – both personal and business. Sometimes, banks offer lower interest rates based on your credit score.
- Lose Assets When Default: To ensure the investment is secure, some financial institutions need business owners to offer some form of collateral if they cannot repay the loan. So, when you default on payments, they may seize the asset, and you lose it.
Different Types of Business Loans
There are several types of small business loans. So, before you apply for one, you must check which one works best for your business. Here are a few small business lending options.
- SBA Loans: If you have strong credit, go for SBA loans, which offer low rates, high lending amounts, and long payback periods.
- Microloans: Offered through non-profit and the government, microloans provide business loans offering up to a maximum of $50,000 to start-ups and small businesses.
- Business Credit Cards: They are revolving lines of credit. You can easily draw from and repay the card whenever needed, provided you make minimum monthly payments and don’t cross the credit limits.
- Term Loans: They are one of the most common types of small business loans, offering a lump sum fund that you can repay over a fixed period.
- Equipment Loan: If you need a loan to buy equipment for your business, go for an equipment loan, as the equipment itself secures the loan for business owners with less-than-ideal credit.
- Commercial Mortgage: If your business owns any commercial asset, like a retail shop, you can opt for a commercial mortgage with the property acting as collateral.
The Final Takeaway
There are both pros and cons of taking loans for small business owners. However, no other form of funding offers more flexibility than loans. If you have a strong credit score, loans can actually work in your favor, offering you favorable rates and terms. Still, evaluate the positives and negatives of small business loans before going for it!
