You can’t make money without spending money. That’s the harsh truth in business. You need money to fund your cost of goods, operating expenses, and revenue-generating activities such as marketing campaigns, expansion projects, and research and development.
Every business day, money is going out. You pay for day-to-day expenses, due bills, and contingencies. Meanwhile, revenue is coming in at a trickle or any at all. To be sure, you look at your cash flow statement. There’s a deluge of bills coming.
Payments to suppliers and contractors have been lined up. Subscription renewals to software, Internet and phone carriers, and utility companies are creeping up on the calendar. Payroll is just around the corner.
You look at your bank statement and feel like a deflated balloon. You’re encroaching on your savings, and your business is close to becoming an “unprofitable center.”
You’ve come to a point where getting a small business loan is a good idea.
Or is it?
What Are Good Reasons For Getting A Small Business Loan?
In 2022, the Federal Reserve conducted its Small Business Credit Survey, which showed that 43% of small businesses applied for a loan. How large were the loans?
A study by Fundera revealed the average business loan per type of lender as follows:
- Small Business Administration (SBA) Loan – $107,000
- Medium-Term Loan – $110,000
- Short-Term Loan – $20,000
- Business Lines of Credit – $22,000
- Large National Banks- $564,000
- Small Banks – $184,000
- Alternative Lenders – $80,000
There are seven good reasons why you should get a business loan:
1. Start a Business
The lightbulb moment that launched your business idea was an exciting time. Transforming the idea into a real business can be a stressful time. Whether it’s home-based or it needs an office, you need money to start a business.
You can bootstrap your business. However, you’ll be limited by your savings and sources of income. If you draw funds from the revenues of your business while it’s still trying to gain traction, you might stifle its growth.
A small business loan can help your business get off the ground by paying for startup expenses. These expenses include business registration and licenses, office equipment, and rental fees and provide you with 6 to 12 months of working capital.
2. Expand a Business
Are you planning to open another location? Are you thinking of expanding your office or the capacity of your warehouse? Is it time to hire more people?
Those questions come to mind when your business is growing. Applying for a small business loan is a good idea. You’re confident that the increase in business revenue should be enough to cover loan payments.
3. Purchase Equipment
If you’re setting up an office, you’ll need computers, workstations, a safe, a filing cabinet, and light fixtures, just to name a few. A construction business will need to buy heavy machinery.
Buying equipment will cost a lot of money. Getting a small business loan will provide you with the necessary funding to purchase equipment. You don’t have to draw from your savings or allocate income if you’re holding down a day job.
4. Acquire a Business
Acquiring an existing business is a smart way to start your entrepreneurial career, especially if the business has built its brand in the industry and has amassed a sizable customer base.
However, acquiring a business means buying its assets and equity. You might also be asked to take on its existing loans plus pay an amount as its premium and as goodwill.
Applying for a small business loan is good because you know how the business is performing. Using the financial statements as references, you can negotiate realistic and sustainable payment terms.
5. Finance Marketing Programs
Marketing is an important activity for businesses. You must market and promote your business to build its brand, create awareness, and attract new interest.
Some businesses hesitate to allocate funds for marketing purposes because they are unsure whether the campaigns will deliver the desired results.
Consider getting a short-term loan. This type of loan doesn’t involve large amounts of money and is often used to pay small, non-recurring expenses.
6. Fund Unexpected Expenses
What would you do if a water pipe burst, flooded your office, and destroyed equipment and the flooring? This unexpected event could seriously disrupt your cash flow.
A quick solution would be to acquire a business line of credit. Some banks or lenders can offer you a line of credit where you can draw funds as needed. You only pay for what you borrow.
7. Settle Debts
If you financed the purchase of office equipment with your credit card, you can get a small business loan to settle the outstanding balance. Credit cards charge high interest rates on their advances, but this is the price you pay for their convenience.
Settling the outstanding debt on your credit card bill with a small business loan that charges a lower interest rate will improve your business cash flow.
7 Types of Small Business Loans
Now that you know your reason for borrowing money is justified, which type of small business loan should you get?
The type of small business loan that you’ll apply for will depend on many factors, such as:
- The purpose of the loan;
- The type of business you’re running;
- Your projected financials – cash flow, income statement, and balance sheet.
Let’s start with the most commonly applied type of loan.
1. Term Loan
What is it?
With a term loan, you’re given a lump-sum payment of cash upfront that you repay with interest over its term. The loan term can be as short as a few months to as long as 1 to 2 years. Repayment is calculated as a fixed amount and scheduled monthly.
A term loan is best for:
- Businesses that have been operating for at least six months.
- Businesses that are in expansion mode.
Pros:
- Availability of large loan amounts.
- Competitive interest rates.
- Longer repayment period.
- The lump-sum cash payout will allow you to fund the purpose of the loan right away.
- Fixed payments will allow you to plan out your cash flow more accurately.
Cons:
- Penalty for early repayment.
- The long repayment period might not be ideal for some businesses that have already established smooth revenue streams.
- The lender might require you to cover the loan with collateral.
2. SBA Loan
What is it?
An SBA loan is a type of loan that’s partially guaranteed by the Small Business Administration (SBA). A micro SBA loan can lend you below $15,000, while an SBA 504 loan can go as high as $5.5 million. SBA loan rates are among the lowest in the industry, and repayment periods can last as long as 25 years.
An SBA Loan is best for:
- Businesses that are planning to refinance outstanding debts to improve cash flow.
- Businesses that have a strong credit history and steady streams of revenue to maintain paying long-term loans.
Pros:
- Low interest rates.
- High loanable amounts.
- Long repayment terms.
- The required downpayment is small.
Cons:
- The application process can be tedious.
- The loan qualifications can be stringent.
3. Business Lines of Credit
What is it?
A business line of credit is a revolving fund that’s opened to you by the lender. You can withdraw any amount from the line of credit at any time. Think of this type of loan as a credit card, where you only pay for what you borrow plus interest. Once you repay the borrowed amount, you can draw from the line of credit again.
A Business Line of Credit is best for:
- Businesses that have short-term financial needs.
- Businesses that need to cover unexpected expenses and emergencies.
Pros:
- Stress-free, fuss-free access to immediate cash.
- Typically, a lender who approves a line of credit will not require collateral.
- Low cash advance fees.
Cons:
- The cost of the line of credit might include fees for maintenance and withdrawals.
- The lender might lower your credit limit.
- The lender might require you to cover the line of credit with a personal guarantee.
4. Invoice Factoring and Financing
What is it?
These are types of small business loans that use your invoices as a form of collateral. With Invoice Factoring, you sell your unpaid invoices to a factoring company. A percentage of the unpaid invoices will be paid out to you in upfront cash. The balance will be released to you once the invoice has been paid.
In Invoice Financing, also called accounts receivable financing, the lender holds your invoices as collateral in exchange for a cash advance. The difference between Invoice Factoring and Invoice Financing is the method of collection.
In Invoice Factoring, the company’s personnel contact your customers to settle their invoices. Your customers will know that your business is in financial trouble. In Invoice Financing, you remain responsible for collecting payment for the invoices.
Invoice Factoring and Invoice Financing are best for:
- Businesses that have run into liquidity problems because the total amount of unpaid invoices has accumulated to unsustainable levels.
- Businesses that need cash to settle payments right away.
Pros:
- Fast approval.
- Access to immediate cash.
- Lenders aren’t too strict with credit requirements.
Cons:
- Interest fees are higher than other types of loans.
- Your business reputation can get damaged.
- Limited amount of funding.
5. Merchant Cash Advance
What is it?
A Merchant Cash Advance lending approach is less structured than a typical small business loan option such as a Term Loan or an SBA Loan. The MCA company will give you a lump-sum cash advance calculated using a fixed percentage of your future credit and debit card sales. Instead of charging an interest rate, MCA applies a factor rate to calculate your fees. The factor rate is usually 20% to 50% of the cash advance amount.
Merchant Cash Advance is best for:
- Businesses with consistent credit card sales.
- Businesses that urgently need funding.
Pros:
- Access to immediate cash.
- Minimal loan requirements.
Cons:
- Fees can be quite expensive.
- Issuing frequent payments might affect cash flow.
6. Business Credit Cards
What is it?
A Business Credit Card is a line of credit that’s made available to you by the issuer. Every time you use your credit card, you’re charged interest on your purchase. Instead of paying the total amount stated on the bill, you can settle the minimum amount and continue to use the credit card. However, if you only pay the minimum amount, the balance on your credit card will accumulate, and you might end up with a total bill you can’t settle.
Business credit cards are best for:
- Businesses that generate consistent sales.
- Businesses with short-term financing needs.
Pros:
- Fast application process.
- Access to immediate cash.
- The option to pay the minimum amount can help manage cash flow.
Cons:
- Charges on accumulated expenses can be high.
- Credit limits can be on the low side.
7. Equipment Financing
What is it?
Equipment financing is a type of small business loan where the equipment you want to purchase is used as collateral. Although commonly associated with construction machinery, you can use Equipment Financing to buy computers, servers, furniture, coffee makers, and other equipment you need for your office. The terms and fees charged on the loan will depend on the financials of your business and your credit standing.
Equipment Financing is best for:
- Businesses that need to purchase a lot of equipment.
- Businesses that eventually want to own the equipment.
Pros:
- Immediate availability of collateral.
- Borrowers with bad credit standing can apply for a loan.
- Fast approval and immediate access to cash.
Cons:
- Some lenders might still require a downpayment.
- If the equipment you bought isn’t durable, it will depreciate faster and you’ll end up with a worn-out item.
Conclusion
You should get a small business loan if you’re confident you can generate enough revenue to cover the repayments over the loan term. If you can diligently pay the amortization of your loan without significantly affecting your cash flow, go ahead and apply for the small business loan.
Don’t get complacent if financial studies present your business as profitable. Financial studies are just forecasts; just like the weatherman, they’re not always accurate. However, use them as guides in managing your funds.
Likewise, don’t be discouraged if the financial studies reveal your business as a losing venture. If you believe that your business has the potential to succeed, apply for a small business loan.
The bottom line is that a loan gives you the financial means to fund your business and transform an idea into a money-making opportunity.
If you get a small business loan, one of the first things you should get is a website. With a website, you can maximize the potential of your business because you can open streams of revenue on the Internet.
Contact us, and let’s discuss how a website can help you earn enough income to pay off your small business loan and grow simultaneously.
