In 2020, the United States Small Business Administration estimated that 31.7 million small businesses existed in the country. Small companies are an American tradition that dates back to the colonial days. People in the trades remained the economic lifeline of the country and their families from the late 1600s to the early 2000s.
The tradition is one reason why loan programs still exist for smaller companies. An entrepreneur with an idea can thrive in the USA.
Entering 2022, several financing options exist for companies of all sizes. It’s possible to fundraise, crowdsource, and invest. Banks and the SBA still provide small business loans too.
We take a look at the five pros and cons of taking out a small business loan.
Pro: Low-Interest Rates
Interest rates for bank loans made to smaller companies range between 2.54 to 7 percent. The higher the interest rate, the more expensive the debt. When a company files its taxes, tax-write-off loopholes for the interest rate charges exist.
It’s nice to receive some money back from the government after the fiscal year. However, managing the cash flow during the fiscal year is important too.
The average interest rate for SBA loans starts at 2.27 percent. In addition, the rates depend on the length of time it takes the recipient to repay the debt in full. Thus, they base the rates on a tiered system.
When you sign your agreement, ensure that you understand the terms. Then, do your best to repay the debt promptly.
Pro: Range of Amount Lent
The cost of completing business activities is high for some industries. Wholesalers, retailers, and manufacturers require a large infusion of capital from the start.
To sell raw materials and finished products, you need to purchase them first. Your business suppliers might work with you on a 30-day invoice. Nonetheless, you need the funds in a short time.
If you manage to sell all the goods within 30 days, you put yourself in a solid financial position. Those who manage their sales pipeline and finances well can pay their suppliers and creditors quickly.
As a businessperson, you must plan for the worst and amass a reserve of cash.
Loans for small businesses range from $500 to $5.5 million. Criteria that dictate the thresholds are set. Before applying, it’s a good idea to understand the lending parameters.
Even though the amount lent by the SBA for small businesses is significant, obtaining additional forms of financing remains good business sense. It’s worth considering outside investors too. Now Corp. offers additional information on outside investors to consider.
Pro: Range of Business Types
In 2019, information companies had the highest failure rate at 24.7 percent. These companies include software developers, content creation, and data processing.
Wholesale trade, warehousing, administrative, and scientific companies also have between 20 to 24 percent failures rates. This means that banks are less likely to fund them without a thorough business plan, collateral, and alternative funding guarantees.
Even though banks help facilitate SBA loan applications, the SBA is willing to fund high-risk companies trying to get off the ground.
Keep in mind that if the company shuts down, the owners become personally responsible for repaying the debt.
Con: Application Process Moves Slowly
Most company owners who apply for financing need the funds quickly. An SBA loan application moves slowly. It can take two months before the applicant receives an answer.
Thus, it’s not a good idea to apply when your company’s cash flow is low or lacking. Ideally, you’ll apply for these funds before you launch your company.
Con: Personal Credit Report is Evaluated
Since the SBA lends money set aside by the American government, the application process is thorough. By extension, you borrow from the American taxpayer.
If the company applying for the funds has existed for a period, they look at the company’s credit history. The application evaluators also take a look at the personal credit report of the owners.
Therefore, if the owners have had credit issues in the past, it factors into the evaluation.
If the owner’s personal credit history lies on the fence, the loan could receive approval. To balance the risk, you may place collateral toward the debt. A deposit of 10 to 20 percent is also commonly requested.
Several ways to finance the operations of a small business exist. Among them is a loan. It’s possible to leverage a small business loan in financially savvy ways that benefit your company. If you obtain debt to fund your company, ensure that you can repay it promptly.