Loans are an integral part of starting a new business. Few individuals have the cash on hand to open a new business, even a small one. So various institutions make loans available for those seeking funding. Of course, loans are available for a wide variety of reasons, but we’ll focus on small business loans for today.
The main benefits and advantages of a business loan are substantial. Business owners can maintain full ownership and control, do so without a lot of cash upfront, build credit, and protect their personal assets. Business loans are available to all types of business owners, including first-time entrepreneurs.
Over the years, business loans have evolved and entrepreneurs have more options than ever for securing funding. Let’s review some of the benefits of business loans and how they can help anyone get their business off the ground.
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A business loan typically lets you have control over your money. Initially, the borrower will need to explain their reasoning behind their business and how they plan to be successful. Presenting a thorough and clear business plan is essential for securing small business loans. In fact, for traditional business loans, including those from the SBA, businesses must meet a certain credit score threshold, predict an adequate amount of annual revenue, present a great business plan, and put forward adequate collateral against the loan.
This help ensure the lender that the loan will be repaid in full over time. Of course, some interest is still charged for the inherent risk associated with any loan, but good credit and a business plan will reduce these rates.
But once the money is secured, business owners are free to use it as they please barring any conditional aspects of the loan.
See related: How to Qualify for a Small Business Loan
By taking a loan out, business owners also maintain full ownership of the company. Financing through partnerships and investors often means that you’re selling a portion of your business to secure cash upfront.
While this is helpful in the beginning, it can lead to a burdensome future. Business owners will be subject to the demands of investors and partners that can impact how the business is run, its trajectory, or even its ethos.
Instead, business loans ensure owners that they’ll maintain full ownership and control of the company so long as all loan repayments are made on time.
Starting a new business is expensive. Even starting a new food truck or small online shop can cost $100k or more. Which is where business loans come in.
These allow entrepreneurs to borrow a large amount of cash immediately. Few people have the liquidity to finance such a business upfront. And personal loans are unlikely to provide enough money for a significant investment.
Depending on the project, business owners can secure millions of dollars through a smart business loan.
Taking out a business loan will also improve your business’s credit score – should it be repaid in a timely manner, of course. In much the same way that personal loans and lines of credit work, doing so will improve the chances of securing future loans for larger amounts of money.
Plus, better credit will ensure that you get better interest rates down the road, helping business owners avoid accrued interest. Even small changes in your interest rate can have a massive impact on the final amount paid on a large loan.
Business loans can provide you access to funds conveniently. In general, they are relatively easy for even first-time business owners to secure. There are enough options out there that even people with poor credit can find a lender.
On the other hand, it can be tough to find an investor quickly. They tend to favor well-established businesses or entrepreneurs who have already shown the ability to scale a profitable business. Of course, these factors will also help secure a business loan, though these lenders are usually more open to new business owners.
Business loans can also be structured in a way that allows the business to invest a portion of their profits back into the business rather than having to pay it off aggressively. Investors don’t usually come with this convenience – business owners are more likely to feel pressured into returning their investment more immediately.
The average business loan has a much lower interest rate than other loan options, particularly short-term loans like cash advances. Traditional business loans come from huge establishments or government agencies that can afford to offer long-term loans with affordable rates.
Having a low-interest rate simply means a lower repayment amount. And, as we mentioned above, even a seemingly slight difference can make a HUGE impact in the final total repaid.
Interest that borrowers pay for business loans is tax-deductible. The deductions also include your accrued interest on personal loans and personal credit cards used to finance your business that can be claimed through personal income tax filing.
The IRS treats business loans as a business expense which is why the interest is tax-deductible along with other business-related credits that you acquire.
See related: Tax Deductions for Small Businesses
Another perk you can have with business loans is that in the worst-case scenario that your business fails, the lender cannot force you to pay off the entirety of the loan. The lender will take back what you owe by liquidating your business. This is not the case with alternative lending options.
Liquidation means that your assets will be sold to pay for your balance on the business loan, whether in full or partial, depending on how much your assets are worth. This is a huge benefit for you as an individual because, in case of default, your company is the only entity that will be bankrupt. You, the individual business owner, will not be forced to declare bankruptcy. Securing future loans will be much more difficult, but your personal assets will be protected.
Some business loan lenders do not require you to have collateral before you qualify to take out a business loan. What they will need from you is a solid business plan that proves your business’s viability as well as how well you will be managing it.
The lenders will assess businesses via their cash flow, income, and stability. These factors are already enough to know whether you can pay back a business loan or not. SBA loans are backed by a federal agency, so collateral will not be needed.
Types Of Business Loans
There are so many types of business loans you can choose from. The sheer number of options is another one of its benefits. To know what is in store for you, here are the different types of business loans that can help you fund your business.
This is a loan given to small businesses through an SBA-approved lender and backed by the Small Business Administration, a government agency that assists small entrepreneurs and businesses.
Business Term Loan
Provides a large sum of money upfront for large businesses that require cash for expansion, upgrades, and more. Companies often borrow millions with this type of loan.
A microloan is an available alternative to business financing for small businesses. Microloans are a great way for small businesses to get a loan with no or little money upfront. Banks do not provide small amounts of loans, which is why microloans are made available by government agencies, like the SBA, or non-profit organizations to aid small businesses that can not acquire funding from other sources.
Business Credit Card
A business credit card is the same as your credit card, where you can use it to fund your business up to its credit limit. You can use the card anytime you need as long as you make minimum monthly payments.
Merchant Cash Advance
This type of business loan is the same as the business term loan. The only difference is that in merchant cash advances, the lender will acquire a percentage of your daily debit card and credit card sales with a fee instead of paying a fixed monthly payment. Interest rates for these are typically very high, and it should be saved for emergencies.
If your business needs to purchase a piece of equipment, equipment financing would be the best option. The equipment that you are going to purchase will serve as the collateral of the loan.
A factoring company will provide financial assistance to your business in exchange for unpaid customer invoices. The factoring company will then be the one to collect these invoices’ payments on their due dates. Like cash advances, this should be a last resort.
Are There Pros and Cons to Business Loans?
Like anything, there are pros and cons to business loans. They help business owners scale quickly without needing to carve into their equity. They also allow first-time business owners the opportunity to avoid cash flow issues. Once in place, the loan’s interest is tax-deductible and protects the owner’s personal assets.
But they aren’t always the perfect solution. Business loans can be burdensome over the long term. The monthly payments can hinder cash flow and future growth. And for those with mediocre or poor credit, business loans can also come with high-interest rates.
It’s important to consider the possible downsides before signing up for a new business loan.
There are many options for entrepreneurs in the lending industry. And in general, there are options for just about anyone no matter your financial situation. It’s best to choose the right loan type that is best suited for your current needs.
And once you do secure a new loan for your business, try out KORONA POS for your point of sale solution. On top of managing your sales, inventory, analytics, employees, promotions, and more, you can complete your business taxes and loan management through it, too. Click below to start a free trial.