Many business owners believe that getting a business loan is not beneficial for the business, but there comes a time when every small business needs extra capital. Your business may need funds to replace outdated or broken machinery.
No matter you need investment to launch a new startup or want to boost existing cash flow, small business loans always help you? Small business owners, at some point, have to make a decision to take out a small business loan. Before diving into further details, you should understand that returning a loan is extremely important.
What is a small business loan?
No matter you are starting a new venture or already have a business, you may need a small business loan at some point. Well, who does not like the idea of being his own boss? Running a business is not easy as it takes quite a bit of money. A small business loan provides you with the cash your venture needs.
Small business loans are types of financing provided to small business owners for different purposes by different lenders. The lenders lend you money, and you have to pay it back within a specified time. They charge interest on the money they lend you.
With time, several types of small business loans have evolved to help businesses meet their goals. Now you may be thinking about how a small business loan works? Well, how a small business loan works entirely depends on the type of loan you have obtained.
Affordable small business loans provide a great opportunity for small business owners to keep the operations running. Before applying for a business loan, you must understand how it works. You should know about the different types of small business loans. Ask yourself, am I eligible for the loan.
Types of small business loans:
You are looking for debt financing for your business; there are many sources you can turn to. If you are unable to determine what type of loan you should acquire, then don’t worry.
Your lender will help you decide what type of loan will be best for you according to your needs. It is better to have a general idea of small business loans as it will help you better understand what the lender is offering.
So, here are the types of small business loans you can obtain from a commercial bank or an online lender:
- A business line of credit:
A business line of credit provides access to funds up to your credit limit. When you use a business line of credit option, you pay interest only on the amount you have drawn. A business line of credit is the most useful type of loan for small business owners.
A line of credit loan is intended for the purchase of inventory and payment of operating costs for working capital. Bear in mind that these loans are not intended for the purchase of real estate or any equipment.
Line of credit loans is best for small businesses as they protect them from stalled cash and business emergencies. Since it is an unsecured loan, no collateral is required. To get a business line of credit, you need to have strong credit and revenue. If you are running a seasonal business, then a business line of credit is best for your business.
- Equipment loans:
One of the most popular asset-based loans is the equipment loan, which is also known as equipment financing. If you need funds to acquire new or used equipment, then the equipment loan provides you a great opportunity.
The loan term is typically matched up with the expected life span of the equipment. In this type of loan, the equipment serves as collateral. The interest rate depends on the value of the asset and the strength of your business.
In case you have strong credit and business finances, you can get competitive rates. Equipment financing helps you own the equipment and build equity in it. But there is a downside of this loan too. The equipment can become outdated more quickly than the length of the financing. You may have to come up with a down payment too.
- SBA Loans:
As a business owner, you know that you may need funds at any point to keep the business operations running. You might have heard about the SBA Loans. These are government-backed small business loans that are available from private-sector lenders.
The small business administration guarantees the loans, and the repayment period depends on how you plan to use these loans. SBA loans are only for businesses based in the United States. If your business is operating as a non-profit entity, then you cannot get an SBA loan.
The terms of SBA loans vary by the size of the loan. To apply for an SBA loan, you should visit the SBA website for complete information.
The benefit of obtaining an SBA loan is that you get some of the lowest rates on the market. They come up with long repayment terms so you can pay them easily.
But the problem with these loans is that they are hard to qualify. The long and rigorous process of application is another big issue. But these loans are best for businesses looking to expand or refinance existing debts.
- Invoice factoring:
Do you know that you can get money against your unpaid invoices too? Your business has outstanding customer invoices, which are typically paid within 60 days; you can get money for those outstanding invoices through invoice factoring. This type of finance is best when you can’t wait long to get paid.
In invoice factoring, you sell your unpaid invoices to a factoring company. The company is then responsible for collecting payments from the customers when the invoice is due. Invoice factoring provides fast cash for your business.
Another advantage of this type of loan is that your application gets approved faster than other traditional funding options. Bear in mind that invoice factoring is costly than other funding options. Businesses with unpaid invoices can get faster cash with invoice factoring to meet their business needs.
- Startup loan:
You have a solid business plan, but due to a lack of funds, you are unable to do anything. You do not have enough funds, but it does not mean that you cannot start your own business. Who does not want to be his own boss? Startup loans help entrepreneurs turn their dream of starting a business into reality. A startup loan gives you the capital necessary to:
- Build office
- Purchase equipment
- Purchase inventory
- Hire and train staff
- Meet other expenses
If you have a plan to start a new business, startup loans are a great choice. You can utilize the money to launch a new business and earn profits. However, there is specific criteria you have to follow to qualify for a loan. The lender will scrutinize the documents you have provided. He just wants to make sure that you will be able to pay back the loan with the predefined period. Keep n mind that he will get interest on every payment.
Advantages and disadvantages of small business loans:
Small business loans are borrowed from online lenders or banks and must be repaid-with interest within a predefined period. Since you will be paying interest on a loan, you must be careful while choosing the type of loan. You should do a little research to determine what type of loan best suits your needs, and do you really need a loan?
Small business loans are one of the most popular funding options available to entrepreneurs. So, as a business owner, you must be aware of the advantages and disadvantages of getting a small business loan.
Advantages of small business loans:
There are plenty of reasons entrepreneurs obtain small business loans. Here are a few advantages of getting these loans:
Getting a loan can be a time-consuming process, but it is convenient to get a loan as every town has a bank or other financial institution that lends money to the businesses. Also, you can find many online lenders who are lending their money on relatively easy terms to small businesses.
- Low-interest rate:
When you obtain a loan, you have to repay it with a predefined interest rate. It is necessary to understand that the interest rate depends on various factors, including the amount you are borrowing. However, business owners with good credit history can get a relatively low borrowing rate on a small business loan.
- Different types of loans:
The best part is that there are different types of small business loans available out there, which means you can access funds to meet a variety of needs. For instance, if you want to replace outdated or broken machinery, you can apply for an equipment loan.
If you need some cash fast, you can go for invoice factoring or a business line of credit. In simple words, you can get a loan according to your specific needs.
- Tax benefits:
It is great news for those who are looking for a loan to meet their business expenses. The businesses that get bank loans enjoy some tax benefits too. Since they are repaying the loan amount, it is exempted from tax.
As already stated above, getting a loan is not a simple task. Here are a few disadvantages of getting a small business loan:
- Long process:
Getting a loan is a long process as the lender has to scrutinize the documents and verify the information you have provided to him. He is taking a great risk by lending you’re his money, so he has the right to make sure that you will be able to pay his money back on time.
So, reviewing the documents and the application process takes time. Before sanctioning a loan, the lender will verify all the credentials.
- Preference to establish businesses:
Lending money to a business is quite risky. So, lenders have to make sure that they will get their money back along with interest on it. Most lenders prefer to give loans to established businesses. If you are a fresh-faced entrepreneur who is just starting, getting a small business loan can be more difficult.
- Difficulty in qualifying for loan:
Lenders have a long list of conditions the businesses have to fulfill. If a business fails to fulfill all these conditions, it can be quite difficult for it to qualify for a small business loan. Sometimes, it is not possible to meet all the conditions, which can reduce the chances of loan approval.
- Risk of losing collateral:
When you obtain a loan against collateral, there are chances of losing it. If you fail to repay the loan, the lender has the right to seize the property/asset you have kept as collateral.
It is true that getting a loan is not an easy task as you have to take care of several things while applying for a loan. You have to make sure that you are making loan payments on time to avoid any penalties etc. At the same time, you have to manage other business expenses too. But sometimes, you have no other option than to apply for a loan.
It is suggested to take a loan only when you really need it. You should ask yourself if there is any other way out than taking a loan. Make sure you know what type of loan would best suit your needs. Also, check if you will be able to make payments easily.
A little research before applying for a loan can save you from getting into trouble. So, if you are looking for some additional funds for your business, then apply for a small business loan.
Should I apply for a loan? If you need funds to start up or expand your business, then getting a small business loan is a great idea. But make sure you know the requirements to fulfill before applying for a loan. Keep in mind that every lender has different criteria to qualify for the loan.