Should you get a small business loan? Each business is unique. So, there’s no single, universal answer to this common concern. However, we can examine some important questions, whose answers can help you make the best decision for your situation.
What is a Small Business Loan?
A small business loan works just like personal credit, only it’s intended to help you grow your business. For a new business, you will still personally guarantee the loan, but you will have to qualify based on your business’s health and your ability to demonstrate how the money will make your business more profitable and stable.
Though they are conceptually similar to personal loans, you can expect to see a few differences with small business loans:
- You can get a small business loan for far more money than for most personal loans short of a mortgage
- You may pay more interest, and possibly higher fees, than you would for a comparable personal loan
- The application process can sometimes be more detailed and time-consuming
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How Can I Use a Small Business Loan?
Don’t think of small business loans as a credit card, which you use for convenience or to buy something today that you can’t really afford until tomorrow. Think of small business loans like student loans: specific investments that will make you more money than you paid in interest once you’ve leveraged what you buy.
By making this kind of investment, you can make more money sooner. This process can help you grow your business’ profits and income. In comparison, a small business loan is much like a student loan.
You borrow and spend the money during college so your salary post-graduation is high enough to justify the expense and interest. With a small business loan, you borrow and spend the money one year to make more money moving forward through the next several years.
What Kinds of Businesses Can Benefit from a Small Business Loan?
Businesses in every industry and region can, at one time or another, benefit from the right kind of small business loan. When talking about kinds of businesses that benefit, you should consider what stage the business is in. Some stages that often benefit greatly from small business loans include the following:
- Starting businesses in need of seed money
- Retailers or wholesalers with large orders to fill before their payment comes in
- Businesses in an expansion phase who are adding new equipment, staff or locations
- Seasonal businesses that are preparing for the rush
- Companies who are taking advantage of an unexpected opportunity
- Businesses in need of extra employees temporarily
- Companies who are ready to expand their marketing presence
Basically (as mentioned before), any business that has the ability to make more money in the present once they have some money available to invest is likely to benefit from a small business loan.
There are many businessstages that often benefit greatly from small business loans.Click To Tweet
What Are the Most Important Considerations?
When dealing with a legitimate lender, the considerations associated with obtaining a small business loan are more about why you’re taking out the loan and what you do with the money. If you’re thinking about taking on a small business loan, make sure you keep the following things in mind:
- Not having a definite purpose for the money, which almost always means that you are borrowing money that will not pay for itself. Always have a concrete plan and incorporate benchmarks that will help you ensure that you are properly using your small business loan funds
- Buying things your business doesn’t really need. This can include upgraded equipment or furniture that merely makes your office look posh, or distracting ideas that you haven’t fully investigated. Borrow only for things the company truly needs to boost business and revenue.
- Not having a definite plan for payback as a loan is a lot less profitable if you have to pay late fees or deal with other hassles associated with not paying the loan on time. Use realistic projections about what the loan can do for you, then set up a payment schedule based on conservative numbers.
- Timing the loan wrong, so you fund early and pay extra interest or fund late and miss your window. Online loans can potentially help eliminate this problem, since their rapid speed of approval and funding lets you time the loan more precisely.
- Not borrowing enough. This is a little counterintuitive. Borrowing less is better than borrowing too much, right? Not in this case. You should borrow enough money to fully leverage the advantage you hope to get from the additional funding. If you can’t achieve your intended purposes then you’ll be making smaller payments, but making less money off the loan.
The Bottom Line
Your job as the manager or business owner is to see how many of the above questions you can answer. Once you have a clear understanding of these concerns, you will then be able to make the best decision for your company and situation.
If you lack a clear plan for the money and aren’t sure how you will be able to pay back your small business loan, then you might need to evaluate your business and your goals before getting a small business loan. In contrast, if you know exactly what you want to do with the funds and how you’ll do it then a small business loan may be exactly what your company needs to advance in the business world.
FAQs
Whether you need to expand your operations, cover unexpected costs, or need some extra cash to keep your business afloat, a loan can be a great option. Keep in mind, though, that you should always research your options and compare interest rates before you decide on a lender.
What are the disadvantages of a loan in a business? ›
One of the biggest drawbacks of taking out a business loan is the potential for high interest rates. Loans may come with higher interest rates than other forms of financing, which can increase the total cost of borrowing. Taking out a business loan also comes with the risk of default.
Is it difficult to get a small business loan? ›
While getting a business loan can be difficult since most require strong personal and business credit scores, reliable cash flow and at least two years in business, there are alternatives available to obtain the cash you need.
What is a good amount for a small business loan? ›
How much of a business loan you can get depends on your business's annual gross sales, creditworthiness, current debts, the type of financing, and the chosen lender. In general, lenders will only provide loans up to 10% to 30% of your annual revenue to ensure you have the means for repayment.
Is it better to get a business loan or use your own money? ›
If you need to borrow a lot of money, a business loan will likely be a better option, as lending limits are significantly higher on a business loan vs. personal loan. If you don't want your personal assets to be at stake, a business loan without a personal guarantee is going to be a better option than a personal loan.
Can business loan hurt your credit? ›
Normally, your personal credit report shouldn't be impacted by a business loan, even if you've personally guaranteed the loan. Business debt and payment history do not affect your credit score, unless the business defaults on the loan, in which case your personal credit can be negatively impacted.
What happens if a business fails with a loan? ›
If you default on an SBA loan, the lender will attempt to seize the collateral you put up to secure the loan. If that's not enough to cover the debt, it will turn to the SBA to get back the insured portion of the loan. Once the SBA settles with the lender, the SBA will come to you.
Is a business loan good or bad debt? ›
In addition, debts with low interest rates and other favorable terms are considered good debt. Some common examples of good debt may be mortgages, student loans, small business loans, some auto loans and some personal loans.
Why is a bank loan a bad source of finance? ›
Loans are not very flexible - you could be paying interest on funds you're not using. You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems. In some cases, loans are secured against the assets of the business or your personal possessions, eg your home.
How many years is a typical small business loan? ›
Terms typically range from one to five years, which is a relatively longer repayment structure than most other online business loan solutions. Long-term loans typically last 7-10 years and are more likely to be available through banks and credit unions rather than alternative lenders, which some business owners prefer.
Both personal loans and small business loans are effective ways to cover expenses to get your small business off the ground. Your choice may come down to how much money you actually need, where you can get the lowest interest rate and whether or not you want to put your personal credit on the line.
How many years is the average small business loan? ›
Business Loan Terms Summary
Loan type | Repayment terms | Time to fund |
---|
SBA loans | Up to 25 years | 30 to 90 days |
Traditional bank loans | Three to 10 years | Two weeks to several months |
Business lines of credit | Six months to five years | A few days to two weeks |
Microloans | Up to six years for SBA microloans | 30 to 90 days |
5 more rowsOct 28, 2022
How much income do I need for a 500k business loan? ›
Whether you need a long-term loan, a line of credit or a business cash advance, $500,000 loans come in many flavors. But you generally need to be in business for one to two years with a minimum monthly revenue of $350K to qualify.
How much money can you borrow to start a business? ›
Backed by the US Small Business Administration, SBA loans for startups are designed to help business owners grow their companies and cover expenses like equipment. There are several types of SBA loans with maximum amounts ranging from $50,000 to $5 million. SBA loans are backed by the US Small Business Administration.
What is the average credit score for a small business loan? ›
You'll generally need a fair score of 600 or higher to qualify for a small business loan. However, some lenders may approve a loan if your score is as low as 500. Understanding what influences your credit score can help you improve it.
Do small business loans have to be paid back? ›
Short-term loans are generally repaid in six to 24 months; long-term loans typically have repayment periods of three years or more. Bank loans secured by collateral generally offer lower interest rates than unsecured loans; however, the lender can take your collateral if you fail to pay back the loan.
Is it better to pay off business loan early? ›
Paying off debt early is usually a smart move. But when you repay a business loan before the term ends, your lender doesn't earn as much interest as anticipated. While most small business lenders don't charge prepayment penalties, some will impose these fees to recoup their financial losses.