Business loans have traditionally helped operations. They’re utilized to enhance cash flow or pay for expensive equipment needed by the firm. Growth and debt consolidation are other uses for business loans. Funding through a business loan has several advantages and drawbacks that need to be considered.
You own your company. Your bank or alternative lender won’t advise you how to use a business loan. With investors, that’s not true. They demand input on company decisions. Bank loans have interest and fees, but you don’t give away a piece of your business or operational control.
Speed to access needed funds. Fundraising from VCs or other investors might take a year or more. When you apply for funding via some types of lenders you can potentially get an approval in minutes or hours.
Loans are usually cheaper than credit cards. Business loans are cheaper than credit cards, on average. According to Experian, the best business loan interest rates vary from 2% to 13%. Business credit card rates start at 13.9%. Your credit score affects loan costs and approval.
Business loan questions
Before deciding which loan is best for your business, analyze your present needs. Here are some questions to address before beginning the investigation.
- Do you really need the money?
- How much do you need?
- How long will you need the money?
- When will you start using the money?
- How’s business financially?
- Does the loan require collateral?
- What is your credit score?
- Do you have additional loans currently outstanding?
- Is this a short-term or long-term loan?
The SBA has lending programs for a variety of businesses. These aren’t direct government loans to small enterprises. The SBA sets criteria for loans given by banks, CDFIs, and microlenders. SBA guarantees loan repayment, reducing lender risk.
Businesses can pick from several SBA loan types, each with its own limits and repayment terms.
Pros and Cons: The government guarantees 75% to 90% of the loan, reducing the lender’s risk. SBA loan conditions benefit borrowers. Additional paperwork, expenses, and approval time are negatives. Traditional SBA lenders may have tighter restrictions.
Pros and Cons: Low interest rates and a speedier approval procedure are the major benefits of conventional bank loans. These loans have shorter payback periods than SBA loans and balloon payments.
Getting a typical bank loan is challenging. In March 2016, traditional banks granted a record 23% of financing requests. Compared to alternative lenders, it’s low.
Alternative lenders are attractive to small firms with poor credit since approval conditions are lax. Alternative lenders provide online applications, approve loans in hours, and finance loans in less than five days.
Alternative lenders give money to small businesses, and lending markets offer several loan alternatives from direct lenders. Some examples are LendThrive.com, Kabbage, OnDeck, and SBG Funding. Bizfi and Biz2Credit offer loans.
Pros and Cons: Your firm doesn’t need a spectacular financial background to operate with an alternative lender, and the loans can be authorized nearly instantaneously. Interest rates can be greater than bank rates. Because of the loan’s nature, you must read the conditions carefully to secure a financially sound arrangement for your firm.
LendThrive.com can help design the right small business loan for your needs!