The benefits of a small business loan

Maybe you’ve been told by a colleague or friend that you should take out a small business loan, but you’re not quite convinced. After all, you’ll be taking on debt that has to be repaid. So why would you want to take out a loan for your business?

Benefits of Small Business Loans

Small business loans can provide a plethora of benefits. First of all, by taking out financing, you don’t give up any control over your company like you might if you brought on investors. You simply borrow the money and repay it over time.

Business loans provide cash when you need it most. You might run a seasonal business where you have less revenue during parts of the year. A loan can steady your cash flow during these periods.

A loan can also help you build credit when you make your monthly payments on time. Down the road, these positive habits can help you raise your credit scores and qualify for even better financing options.

Ways to Use a Small Business Loan to Benefit your Business

Sometimes a business needs a cash infusion to buy supplies during slow periods or cover expenses like payroll. Business bank loans can provide that extra cash flow.

Entrepreneurs might have opportunities to grow their business, perhaps by acquiring another or buying new equipment at a great price. That takes capital.

You can use a loan to purchase commercial real estate, and there are working capital loans available through the U.S. Small Business Administration and other lenders specifically for this purpose.

You might even consider a line of credit, which gives you access to capital when you need it. This is ideal if you’re constructing or renovating a property and don’t know how much you’ll need to complete the project.

Essentially, small business loans can provide the cash your business needs to survive, thrive, and succeed.

When is a Small Business Loan a Good Idea?

So if you apply for a loan, when is the ideal time?

Ironically, the best time to apply for business financing is when your business is in good shape. Because lenders will look at your credit history to determine eligibility, you’ll want to have good credit if you want to qualify for the best rates on term loans. Financial institutions and SBA loan programs may have stricter requirements for credit and annual revenues for loan approval, so find out what they require before applying.

Another time that’s good to get a small business loan is if you can get a lower rate on an existing loan by refinancing. Getting approved for a lower interest rate could give you better repayment terms and help you save hundreds, if not thousands, over the life of your loan.

Pros and Cons of Common Types of Business Loans 

Now that you’re sold on the idea of taking out a loan, let’s look at each type of loan and weigh the pros and cons of each.

Term Loans

Credit unions, banks, and online lenders offer longer-term loans with lower interest rates.

Pros of Term Loans

• These tend to be the most affordable financing available to small businesses
• You can generally borrow larger amounts

Cons of Term Loans

• Application process may take weeks or even months
• Qualifying may be more challenging than with other loan options

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Intermediate-Term Loan by Kapitus

Great for established businesses looking for large capital amounts.

Pros

• Repayment term of 2-6 years for those who qualify
• Favorable payment plans for businesses with $250k+ annual revenue
• Specialty loan programs for medical practices.

Cons

• Some repayment structures require weekly payments
• Favorable terms for 3+ years time in business.

Funding Amount

$20,000 - $5,000,000

Cost

1%-1.5% per month

Repayment Terms

Weekly, bi-weekly, or monthly payments for 2 to 6 years

Funding Speed

1-3 days ($200,000 or less can be wired same day)

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SBA Loans

SBA lenders make a variety of loans backed by the Small Business Administration, including microloans, the SBA 7(a) loan, and the CDC 504 loan program. (Except for Disaster Loans the SBA guarantees loans; it doesn’t make them. Instead, individual lenders will be approved to make these loans.)

Pros of SBA Loans

• Low interest rates
• Both short and long-term loans available

Cons of SBA Loans

• Generally requires good credit 
• Application can take weeks or months

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SBA Loan by SmartBiz

For high cost projects with long repayment. No immediate funds needed.

Pros

• APR as low as 11.25% with monthly repayment plans up to 10 years
• Ability to be pre-approved and review terms and conditions before needing to provide a full list of financial documents.

Cons

• Lengthy application process (30-60 days) with lower approval odds
• Requires more documents than other Bank Loan products.

Funding Amount

$30,000 - $500,000

Cost

11.25% - 13.25% APR

Repayment Terms

Monthly payments for 10 years

Funding Speed

1 month

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Lines of Credit

If you don’t want all your cash at once, a business line of credit gives you access to cash when you need it. It works very much like a business credit card.

Pros of Lines of Credit

• You only repay what you borrow
• Doesn’t have an end date like a loan

Cons of Lines of Credit

• May have fees in addition to interest
• May require good credit

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Line of Credit by Fundbox

Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• 625 minimum personal credit score
• No impact to credit score to apply (soft pull only)
• No draw fees
• Fast approval and funding, with funds available as soon as the next business day
• Use as much as you need, only pay interest on what you use
• Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.

Cons

• Must have a business checking account with a minimum balance of $500
• May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.

Funding Amount

$1,000 - $150,000

Cost

As low as 4.99%*

Repayment Terms

12 or 24 weeks

Funding Speed

If approved, funds arrive as soon as the next business day.

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Short-Term Loans

Alternative lenders offer short-term loans that have to be repaid within a few months. These types of small business loans may have high interest rates and large monthly payments.

Pros of Short-Term Loans

• Some loans available to those with bad credit
• Application process often fairly easy

Cons of Short-Term Loans

• Interest rates can be very high
• Short repayment period may mean higher payments

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Short-Term Loan by Kapitus

Kapitus offers short term loans up to $5,000,000 in as little as 24 hours. The process is quick and easy with limited documentation and offers the best prepayment discounts in the industry.

Pros

• Repayment options ranging 6-18 months with fixed rates options
• Competitive discounts for those who payoff early
• Extremely competitive product for higher revenue businesses - retains a higher average funding amount
• Your offers can improve as repayment history continues

Cons

• Longer industry restriction list
• Comes with a wide range of rates and terms.

Funding Amount

$5,000 - $5,000,000

Cost

1%-1.25% per month

Repayment Terms

Daily or weekly payments for 6 to 18 months

Funding Speed

1- 2 days ($200,000 or less can be wired same day)

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General Requirements for a Small Business Loan

Each lender will have its own requirements, but generally the approval process will take into account the following factors:

Credit: Lenders may consider borrowers personal credit scores, business credit scores, or both. Keep in mind that lenders may require personal credit checks on all owners with at least 20 or 25% ownership. 

Time in Business: Most small business lenders prefer borrowers have at least two years in business. There are funding options for newer businesses, but they often require strong revenues and/or credit scores.

Revenues: Most lenders will require business bank statements and/or business tax returns to verify revenues. Pre-revenue businesses may be able to provide a business plan with projections for certain types of startup loans.

Tips for Applying for a Small Business Loan

Have you landed on the type of small business loan that’s right for your business? Great! Here are some tips to help with the loan application process.

First, carefully read the requirements to apply. Make sure you qualify with your credit scores, time in business, and annual income. If you don’t, find financing options you do qualify for, though know you may pay more in interest. 

If you don’t like the repayment terms you qualify for because of your credit situation, consider waiting a while, paying down debt, and building your credit so you qualify for better options. Learn how to establish business credit to help you qualify for a range of financing options.

Also, find out if you are required to make a down payment. Some larger loans require them. If you’re strapped for cash and can’t afford a large down payment, consider lowering the loan amount you request.

If yours is a new business, you certainly have options when it comes to financing, but you’ll pay more. Only you can decide whether the cost of financing is worth having access to the capital. Build a budget for how you’ll use the money and how you’ll repay it. Will a loan of, say $10,000, help you acquire $1,000 a month more in revenue? In that case, you will cover your loan expenses in a little over 10 months.  On the other hand, if you have no visibility into how a high-interest loan can help you increase revenues, you might wait until you can afford lower-priced financing.

Is a Small Business Loan Right for Your Business?

Small business owners that carefully think through their decision to take out a loan know that planning ahead for how they’ll use it and finding the financing they qualify for is the best way to grow a business!