Pros And Cons Of Business Loans

Business loans offer financing for business growth and expansion. However, you can strain your business’s revenue if you don’t use your loan properly. Before you pursue a business loan, weigh the pros and cons and make the best decision for your company.

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How Does a Business Loan Work?

Traditional banks, online lenders and credit unions offer business loans as a way for companies to get cash infusions. Depending on your lender, funds may be disbursed as a lump-sum payment, where you pay interest on the full loan amount, or as a revolving line of credit, where you pay interest only on your balance. Payment schedules vary by lender and loan type, and your company is responsible for repaying the loan’s principal, interest and fees on time.

Business Loan Pros

Before you take out a business loan, review the benefits and make sure they align with your business goals.

Several Financing Options

There are a variety of business loans available to meet your business’s specific needs or goals. Explore different loans and choose the one that provides the right amount of financing. A few options include:

Certain business loan types can be more valuable than others, depending on how your business operates. For example, a new company may benefit from a startup loan available to businesses with little credit history. In contrast, an established business may value a business line of credit for ongoing expenses.

Fast Access to Capital

Online lenders approve and disburse business funding faster than traditional banks and credit unions. Funding typically arrives within one or two business days after approval; some lenders even offer same-day funding. Quick loan disbursement is helpful when facing urgent expenses or pursuing time-sensitive growth opportunities.

Larger Loan Amounts

Business loan amounts can reach $500,000—or even $5 million in funding. These loan sizes are ideal for buying real estate, opening new locations, increasing production and taking on other growth opportunities.

Builds Business Credit

Making consistent payments can help you build your business credit as long as your lender reports those payments to the main business credit bureaus. Lenders, suppliers and insurance companies may use business credit to assess the risk of working with you. A strong business credit score may help you qualify for more favorable terms.

Helps You Maintain Control

If you’re torn between equity financing or loan financing, a business loan keeps you in full control of your company. Unlike trading company shares for capital, you retain the power to make all business decisions.

Business Loan Cons

Review the disadvantages of a business loan and weigh them against your company’s financial goals.

Stringent Eligibility Requirements

Lenders take on a considerable amount of risk when they approve business loans. For that reason, most lenders set minimum borrowing requirements, including:

• Annual revenue between $100,000 and $200,000
• One to two years in business
• Minimum credit score of 600

Stringent requirements can make it challenging for newer or less established businesses to qualify for a business loan. If you do not meet the above requirements, consider a bad credit business loan.

May Require Collateral or a Personal Guarantee

Many business loan lenders require that you pledge collateral or sign a personal guarantee during application.

Collateral is where you pledge real estate, equipment or other assets that the lender can seize if you don’t repay the loan. A personal guarantee, on the other hand, makes you legally responsible for repaying the loan with your personal assets if your business cannot, which puts your credit score and assets at risk.

High Interest Rates

Business loans typically have high interest rates compared to other lending products such as personal loans. Your interest rate is based on the type of loan you apply for, the lender you choose, your credit score and business history. Lowering your credit score, however, is typically the best way to land more favorable rates.

Financial Strain on Your Business

Taking on a business loan often means committing to regular daily, weekly or monthly payments, which can strain your company’s finances if you don’t generate enough revenue.

Business loans can also limit your flexibility, stifle growth and, in a worst-case scenario, send you into a debt spiral. It’s crucial to review your cash flow before taking out a loan and consider the relevant factors.

Is a Business Loan Right for You?

A business loan is a good option if you have a clear plan for growing your business, whether it’s expanding operations, buying inventory or investing in marketing, and you can afford the recurring payments. However, a business loan may not be ideal if you don’t have a clear plan for using your funds or if your business has outstanding debt that could make it difficult to repay your business loan.

Alternatives to Business Loans

If you decide against using a business loan, consider a few alternative options.

Business Credit Cards

Business credit cards offer access to revolving credit with set borrowing limits similar to a personal credit card. However, they typically have higher credit limits and more lucrative rewards for spending on office supplies, flights, hotels, and more. We recommend opening a business credit card as a business owner to track and document your company’s expenses over time.

Crowdfunding

Crowdfunding involves gathering funds from family members, friends, neighbors and other individuals you may have a relationship with. You can also use crowdfunding platforms to connect with individuals that you don’t know. Unlike business loans, crowdfunding requires no repayment.

Equity Financing

Some businesses exchange company shares for additional funding from investors. Your investors will want to see your business plan and how their funding will fit into it, so make sure you have a solid and presentable plan to present.

Offering equity will give your investors ownership authority in your company.

Grants

Business grants are lump-sum awards available to businesses through the federal government, private corporations and other entities. Grants, much like crowdfunding, require no repayment. However, you may need to write a proposal or submit other materials that demonstrate your funding needs and how you’ll use it to enhance your business.