WHAT IS BUSINESS LOAN?
Businesses need capital, either to fund operations or simply to start themselves up and begin turning a profit. Banks and lenders are willing to give them the money in advance, so long as they pay it back on an agreed-upon schedule, with interest.
Types of Business Loan
SBA loans
The SBA, or Small Business Administration, does not issue loans to small businesses, but through this type of loan, it guarantees to pay back a portion of a bank loan taken out by small business owners.
Short-term Loans
Short-term loans have repayment terms of a few months to a year or more, good for when you expect a quick return on what you use the loan funds to invest in. Loan approval can be as fast as a few days, even for business owners with poor credit, but higher rates are a trade-off for speed and accessibility.
Bank Line of Credit
While it is not a typical loan, a business line of credit is a similar form of debt financing. Rather than receiving a lump sum of money and paying it back in monthly installments, a bank line of credit operates more like a credit card for a business—just without the card. Money is used by the business as-needed, so there’s no risk of borrowing too much and not being able to pay the excess interest.
Long-term Loan
Traditional long-term business loans offer relatively low-rate financing for lasting investments such as machinery or business acquisition. Repayment terms can last up to 20 years. Approval times tend to take multiple weeks and lenders usually require you to have strong credit.
Pros and Cons of Business Loan
Additional Capital
What could you do if you had access to additional capital for your business? This financing can be essential to help you stay afloat during the lean months and build your business when things are going well. Many business owners have trouble with cash flow, which is why a loan or line of credit can be essential in the hard times. The money can be used for business costs as needed.
Interest Accrual
Whenever you are borrowing money, it is going to cost you in the form of interest expenses. The lender is offering the money with the purpose of making a profit on the deal. Interest expenses aren’t always a bad thing if you can leverage the cash to help your business grow. But if you aren’t careful with money management, then these interest costs could start eating into your profit margins.
Cashflow Management
It is common for small businesses to have ups and downs. For example, companies in the retail business refer to “Black Friday” as the turning point of the year when the real profits start to flow. Then, sales often start to slow down in January. If you are worried about cash flow management in the future, then a business loan can give you the peace of mind for those difficult months.
Money Management
Just because money is available through your small business loan, don’t let that be a reason that you make poor money management decisions. Some business owners find that they are more risky with their money because they have a credit line to tap into. If you put your cash into a questionable business investment that falls through, then you might find yourself between a rock and a hard place when you can’t get access to the cash that is needed for paying the bills.
Build Business Credit
Did you know that your business can build a credit history, just like your personal credit score? Borrowing money through your business can help you establish a reputation that opens up options for more loans in the future when needed. Even if you don’t need access to the cash right now, it is smart to build your business credit so you are ready with the money when things get lean during your slower months.