Do you own a small business? Any business owner can tell you how incredibly stressful it is keeping up with a small business’ demands for capital. Cash flow is often a problem for a small business, and it may be necessary to infuse the business with cash that the normal operations of that business simply aren’t bringing in at the moment. Your business could be operating in the black until an expense or other unexpected investment comes up. When that happens, it may be time to look for a small business loan. But there is a lot the typical small business owners should take the time to understand before seeking such a loan. Small business loans have both advantages and disadvantages.
Bradley James Bryant, writing for Demand Media, explains, “Businesses have two ways to raise capital: debt and equity. Equity represents an ownership stake and does not need to be paid back, however, the owner may have to share decision-making authority with those that provide capital. Debt, on the other hand, represents a claim on the future earnings of the business. …Once the debt is paid off, the lender has no say in business operations or claim on future earnings. Although debt financing may seem like the preferred way to raise capital, especially for independent, entrepreneurial types, there are a few cons to be mindful of before making a final decision. …While debt provides the small business owner with more flexibility over time, bankers usually create rules about how much additional debt the business can take on and how much the business can spend on inventory or other investments. These rules are referred to as covenants in the banking world and the more money a bank lends to a small business, the more covenants they are likely to place on the loan to ensure the payback of funds. …The terms and conditions of the loan can also create a great deal of inflexibility in business operations. You are required to make all payments on the agreed-upon dates in which the amount is due. This is true even if your business is experiencing hard times. In fact, the bank may even decide to “call in” the loan early if they believe bankruptcy or extreme financial distress is imminent. …Rarely do banks give away money for free and the cost of money is referred to as the interest rate. This rate will usually be higher for small businesses than larger, more established businesses as they are deemed riskier. This interest is a real cash expense that affects the bottom line. The higher the interest rate on the bank loan, the less money you have to pay back the loan, which has the potential to create a cycle of debt…”
WAHM.com explains that some unsecured small business loans may be worth considering, but with caveats in place. “With unsecured business loans, there’s may need to present collateral to the lender. That means there’s no risk to existing assets like a home, vehicles, other commercial property, or long-term assets like a 401k or IRA. Some small business owners who take out secured loans tied to their assets get worried about what happens in a default situation. Because the borrower doesn’t need to document their assets in an unsecured business loan, some parts of the loan underwriting process may be easier. …Because unsecured business loans are based on nothing but the borrower’s credit, interest rates can be much higher than those for secured loans that are tied to assets. It’s important to keep an eye on the interest rates that lenders offer and think about how easy these will be to repay in the future. For those without squeaky clean credit, unsecured business loans can have a particularly high debt load. Some lenders won’t contemplate customers with subpar credit, and others will lend at usurious rates that can trap a startup company in eternal debt. Lenders that offer unsecured business loans need to really go over their potential borrowers’ balance sheets with a fine toothed comb. This can take time and effort, and some who apply for unsecured business loan opportunities can be aggravated by the bureaucracy of the process. These days, lots of lenders are fairly skittish about their unsecured business loan offers. It may seem to borrowers as if the lender is paranoid or unfair, but these companies who offer unsecured capital to businesses are just paying attention to their and bottom line. Because the lenders have the money, the lenders make the rules, but some unsecured loan situations can become combat and troublesome, where the borrower may have been able to prevent some headaches by doing more to control her costs to avoid financing of a business.”
One alternative to a small business loan is a small business credit card. According to Investopedia’s Katie Adams, “Small business credit cards provide business owners with easy access to a revolving line of credit with a set credit limit, in order to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. Small business credit cards are marketed as an attractive alternative to a traditional line of credit, but there are some important differences. The first and most obvious difference is that a credit card provides you with a revolving line of credit for your business whereas a loan or line of credit is fixed. That means that you can continue to borrow or charge up to your credit limit as you repay your monthly bill when you use a credit card, compared to a fixed line of credit which requires that you apply for a new loan once you have used and repaid your first loan. Another important difference is the amount of money you can access and the amount of interest charged. Traditional small business loans or fixed lines of credit typically provide a larger amount of financing, which is necessary for more substantial purchases such as equipment leasing and facility costs. These loans cost less because they charge a lower rate of interest. Lastly, unlike most loans or fixed lines of credit, small business credit cards do not require that the card holder put up collateral to qualify for the line of credit. Credit cards represent an unsecured line of credit, meaning that the money is not secured with an asset. Instead, the card includes a requirement for the cardholder to sign a personal guaranty, meaning that she or he is personally and legally liable for repaying the money borrowed on the card.”
Ron Box, in the Journal of Accountancy, writes that the small business loans generally and the SBA loan program specifically offer many different means of accommodating a small business’ specific financial parameters. “For many businesses, the benefits of an SBA-guaranteed loan include having access to capital where traditional commercial loans may not be available,” he writes. “Startups and young businesses without a sustained history of financial performance may find an SBA-guaranteed loan especially attractive. For businesses with cash flow issues, an SBA loan can restructure debt at better terms by providing longer loan maturities and lower payments. Businesses without sufficient collateral to obtain a traditional commercial loan may find an SBA loan particularly useful.” SBA loans are not without their drawbacks, however.” If the federal government is willing to guarantee a substantial portion of a company’s debt at favorable terms, why choose traditional commercial lending over an SBA loan? In general, an SBA loan requires more information than a commercial alternative and more time. Also, there is a perception of complexity in maneuvering through the various SBA loan programs. …Also consider that some businesses are ineligible by definition for SBA loans. Nonprofit organizations, lenders, passive businesses (developers and landlords that do not actively use or occupy the assets acquired with SBA loan proceeds), life insurance companies, and private clubs that limit membership are examples of ineligible businesses. Additionally, SBA loans can require guarantee fees that do not apply to conventional commercial loans. Depending on the amount borrowed, these fees can be significant.”
Street Directory explains, “When starting a new company or business, people may sometimes to get some financial assistance in the form of small business loans. Some current business owners or people who are interested in starting a small business are not familiar with or have never heard of small business loans. Small business loans are loan agreements between a lender and a borrower, usually the business owner, in which the borrower agrees to pay back the borrowed amount of money plus interest. The size of the loan will vary from company to company and also from lender to lender. There are certain lending companies that are willing to give out more money than others. There are several advantages to having small business loans. The money received from small business loans is an extra resource that can be used in any sector of the business where needed. These loans are usually flexible and with the assistance of a financial advisor can be set up in such a way that best benefits the borrower or company owner. Small business loans can be used for a variety of things… Small business loans are not without their disadvantages however. The loan itself will have to be paid back with the interest. This will be agreed upon at the initial borrowing date. However, if you are starting a new company and the company does not profit the way you had expected you might be stuck with a loan payment every month that you cannot make. This is the risk you take. Also by taking out a small business loan, in the end you will pay back almost twice as much money as you borrowed due to the fact that you have to pay back the interest as well. This is something that you should consider before getting a small business loan.”
According to Business Bogs, “Every business needs a certain amount of money to start. The entrepreneur on the threshold of starting a new venture, has to work out where and how he will get access to sufficient funds. The first organization that he thinks of is his bank. Yes banks are almost always one of the first organizations to be approached for funds in the form of a loan. It is here that harsh realities hit the entrepreneur who soon learns how difficult it is to get a bank loan to finance his small business venture. A select fortunate few, do manage to fulfill all the prerequisites for a bank loan, and are successful in procuring them. But for every successful loan application there are many that get rejected. The tough regulations linked to bank loans are gradually undergoing a change with banks realizing the phenomenal potential of small businesses. This explains the special programs and additional services launched by big banks to woo small businesses. Bank loans are just one of the various options available for small businesses to raise funds. The final decision about where to secure funds depends on the balance between the pros and cons of the source. Like all other funding sources, bank loans also come with their share of advantages and disadvantages.”
It’s true that a small business loan is cumbersome and requires applicants to meet a long list of prerequisites. If collateral is offered to secure the loan, that collateral could be lost in the event of a default. And the bank may not grant the entire amount of the small business loan application. That application process, too, can be very involved and can take a very long time to wend its way through to completion. A small business loan, however, offers lower rates of interest than some alternative means of financing, may offer certain tax benefits, and is convenient and accessible if your business qualifies. Let Infiniti Funding handle your small business loan. Contact us today for information.