Whether you are a startup or an existing business looking to expand, you may find more benefits in small business loans than other solutions if you need capital to grow. Finding investors can be challenging and often requires you to give up some control of your company. Therefore, small business loans are a perfect solution for those who qualify because they are much easier to obtain than investment funds and allow you to retain complete control over your company. Let’s take a look at how they work, the reasons you may want to use one, and the benefits of small business loans.
What is a Small Business Loan?
A small business loan is a type of financing that various lenders provide to supply companies with the funds they need for growth. Some of these loans are guaranteed by the Small Business Administration, a federal agency created to help small businesses grow. However, being guaranteed by the SBA is not a requirement for small business loans. Many lenders offer several options to companies for loans that are not associated with the SBA.
Types of Small Business Loans
Not all businesses have the same needs. Because of this, several types of small business loans of developed over the years. Understanding which options are available to you, and the differences between them, is an important first step to finding the right small business loan to help with your growth. Let’s look at some common small business loan types.
1. Conventional Loans
These are regular term loans that you take out and pay back over a given number of months or years. These types of loans will always have a fixed length and will usually have a fixed interest rate. You can use the funds for whatever you need them for.
2. SBA Loans
As mentioned earlier, these loans are guaranteed by the Small Business Administration. Because of that guarantee, the interest rates on SBA loans are much lower than on conventional loans. That is, however, a double-edged sword. The guarantee also means that the application process takes longer, and getting approval is harder.
3. Business Lines of Credit
A line of credit is similar to a credit card. For times when you don’t know exactly how much you’ll need, they let you draw from your total credit limit whenever you need it. With a line of credit, you only pay interest on the amount you have currently drawn out and not paid back.
4. Equipment Loans
If you need expensive equipment for your business and the equipment can be used as collateral, you may get a secured loan for it—these function identically to a home or auto loan. If you fail to repay the loan, the bank will take possession of the equipment.
5. Small Business Cash Advance
These loans work similarly to personal cash advance loans. Your lender will look at your receipts to determine how much money you’ll be able to pay back and how quickly you can do so. Payments are automatically deducted from your credit card sales.
Reasons to Apply for a Small Business Loan
There are many reasons a company may choose to take out a small business loan. Some of them are quite obvious, but others may be less so. Let’s look at some of the reasons people take out a loan for their small businesses.
1. Financing a Startup/Expanding Business
This is one of the most common reasons people take out a small business loan. Starting or expanding a business requires a great deal of capital. A new business has no past profits to draw from, and an existing one often needs more than it has on hand to realize the vision for expansion properly. Small business loans provide the capital required for the business to grow.
2. Building Credit for the Future
Just like in your personal life, if your business doesn’t have any credit, it can be difficult for you to get a loan. As for your personal life, the solution is to start by building your credit with smaller loans that lenders are more likely to give even with little credit history. These loans needn’t be meaningless. They can be used to pay for more minor things you otherwise would have saved up for.
3. Inventory/Equipment
If you own a business, then eventually, some of your equipment is going to need replacing. Often, this happens unexpectedly. A small business loan is a great way to get the money to replace that equipment when it costs more than you can comfortably spend from your cash reserves. Other times, you may find the need to purchase additional inventory to account for an anticipated increase in sales.
4. Build Relationships with a Specific Lender
Just as building your credit can make it easier to get a loan, too can build relationships with a given lender. If you have dealt with a specific lender repeatedly, and they know you are good for the money you are requesting, it can make the process of getting a small business loan from them in the future easier.
5. Liquidity Requirements for Working Capital
Without working capital, a business cannot survive. Still, businesses sometimes hit hard times that make it hard to meet financial requirements such as payroll and utilities. If these rough spots are temporary, a small business loan is a perfect way to get through them with your business intact.
Benefits of Small Business Loans
Small business loans aren’t the only funding opportunity you may have available to you for your business, but they come with several benefits that make them one of the most popular options for funding.
- Convenience: There are lending organizations everywhere, and with the internet, even ones that aren’t physically close are just a click away. In most cases, applying for a loan is quick and easy. This makes small business loans one of the funding methods with the least amount of hassle.
- Options: We’ve already covered some of the types of small business loans. There are also a wide variety of choices within each of those types that make it easy to find the solution that fits your business.
- Control: As we mentioned in the opening, going through an investor often requires you to give up a stake in your business. With a small business loan, you’ll retain complete control over your company while still getting the financial help you need.
- Tax Benefits: In some cases, money borrowed from specific lenders provides some tax benefits. For qualifying loans, a percentage of the money you pay back is tax-deductible.
