How to figure out if a business loan is right for you
In the United States, small businesses borrow around $600 billion each year. The average small business loan pays out $663,000 (as of 2017). There’s no doubt that business loans can be a powerful tool to help fund, launch, and grow a small business. That said, business loans aren’t the right choice for every small business out there. Like anything else, they come with their own host of requirements, pros, cons, and challenges. That’s why it’s important to put some thought into whether a loan is the best option for your business before you start the application process. In this article, we discuss the advantages and disadvantages of taking out a business loan, plus questions you should ask to decide if a loan is right for you. If you ultimately decide a business loan isn’t for you, there are some alternative funding options to help you fund your business. Advantages of taking out a business loan You get an influx of cash to grow your business You (usually) don’t have to give up any equity There are multiple loan products and options to choose from Timely repayment boosts your business credit score Loan interest repayment is tax-deductible In 2017, nearly 40% of business owners in the U.S. applied for a business loan of some kind, so it’s clear there are some key benefits and advantages to taking one out. The most obvious benefit is that your business gets an influx of cash that you can use to launch, expand, or otherwise grow your operation. On that note, business loans also offer business owners access to a relatively large amount of capital, when compared with other funding options. Another advantage is that, in exchange for that capital, bank loans typically don’t require owners to relinquish any equity in the business. That means you maintain complete decision-making control—a big perk for many entrepreneurs. Most banks also offer a myriad of options and loan products, so they can work with you to figure out the best option for your business. Plus, many of those loan products offer much lower interest rates than other funding options (like credit cards or payday loans), especially if you have a good credit score. Speaking of, when you take out a loan in the name of your business, the repayment is a good opportunity to build and improve your business credit score, which is separate from your personal score. Not to mention, as you repay the loan, any interest you pay can be deducted from your quarterly or annual business taxes. Disadvantages of business loans The application process is often lengthy and cumbersome Qualification requirements are rigid Many bank loans require you to put up collateral You only get money—not strategic support Like anything else with that many clear benefits, there are also some drawbacks to taking out a business loan, and they’re important factors in helping you decide if a loan is the best option for you. For one, applying for a business loan from a traditional bank often involves a lengthy and cumbersome application process. That means you have to invest a lot of time and energy into applying and getting approved—time that could otherwise be spent working on the business. Not to mention, traditional lenders have some rigid qualifications for who they’re willing to lend to (most approval rates hover around 26% for large banks and 52% for smaller, local banks). That makes it harder for smaller and newer businesses to qualify. One of those requirements may often include putting up substantial collateral (usually around 25% of the loan amount) that the bank can seize if your business defaults on the loan. The last main disadvantage of taking out a business loan is one that’s often overlooked: the lack of support. When you raise venture capital or angel investment, you often gain a business and strategic partner in addition to the financial investment. When you get a loan, you’re typically only getting the money.