Borrowing money is always a tricky situation, because it’s not something anyone is looking forward to, especially in the world of business. Unfortunately, for many small business owners, an SBA is necessary to keep the business afloat. Small businesses are considered the backbone of the American economy, employing more than two-thirds of the workforce over the last 15 years. Still, it’s small businesses that were most hit by the recession crisis in 2008, and it’s been a slow recovery process since. Over the past five years, 53 percent of small businesses have applied for funding; one in four of those businesses have applied more than once.
A small business loan can be a saving grace for your business, but only if the proper precautions are taken. Business owners seeking the best way to get a small business loan should understand the pros and cons before making a decision.
Small Business Loan Pros
Eases the Load
Without a doubt, small business loans help ease the load and provide businesses with the space and capital they need to grow. According to the Small Business American Dream Gap report, 30 percent of small businesses find it more difficult to reduce operating costs than in the past. And because these loans typically don’t involve balloon payments, it helps businesses to improve their cash flow. Overall, it’s a simpler way to get funding and offers more flexibility than major bank and credit card loans.
Keep All Your Equity & Control
Unlike securing funding through angel investors of venture capitalists, you don’t have to give away a piece of your company. For new businesses, this equity could be as high as 50 percent. Giving away equity also creates a partnership, and partners could have a say in how you run the business, even if you don’t agree with their methods. Small business loans allow you to maintain a stronghold on your creation. If you experience high growth, your cash isn’t being siphoned to another person for the duration of its lifetime. You can repay the loan and still have complete control over every aspect of the business.
Small business loans tend to have better interest rates than credit cards, which often come with steep rates and strict limits. As you pay back the loan, it also builds up your small business credit file and affects your credit more positively than a credit card.
Small Business Loan Cons
Tough Application Process
The application process for a small business loan isn’t a walk in the park. The bank takes on the bulk of the risk, and as such, needs a plethora of information on your business, such as your financials, operating documents, and revenue projections. The process can last anywhere from one to six months. On average, 20 percent of applicants get denied, and many of them don’t understand why.
Cushions of Protection
Banks often require borrowers to offer up collateral to secure the loan in the form of personal assets. This includes a home, car, or even retirement plans. This collateral serves as protection in case the borrower defaults on the loan. This personal investment is a risk for the borrower, which is why they should thoroughly consider whether it’s the right time to pursue an SBA loan. A wrongly-timed loan can have huge consequences, and lead to businesses owners losing much more than they bargained for. They should be prepared to make consistent, timely payments and assume responsibility.
Reliable Credit History
Although small business loans provide resources for business owners that they would be unable to receive otherwise, lenders still need to establish a reliable business credit history. This can be very difficult for borrowers with limited or bad credit history. However, there is a silver lining here. Both the business credit history and personal credit history can be considered if one is particularly lower than the other. In many cases, the lender will try to work with you and understand your credit history and implications. Diving into the process with an open mind and transparency is key.