In this article:
The pros and cons of business loans
When running a business, there will occasionally come a time when additional funding is needed, and youâll start to think about getting a business loan. In my experience, itâs better to have a grasp of the subject before you need it, rather than taking a crash course in finance at the last minute. While we canât cover everything in this article, our goal here is to give you a sense of the pros and cons of taking out a loan and provide you with some tools for comparing loan providers. If you need additional reading to master the subject of small business loans, I suggest starting here.
Pros of small business financing
Some small business owners wait until there is an emergency or immediate need for cash before applying for a small business loan. What those entrepreneurs donât realize is that small business loans can not only help your business out of a jam but can help your business stay out of that sticky situation in the first place. Hereâs how:
- Working Capital â Business loans can immediately increase the working capital of a business. The loan funds received upfront can be used to cover monthly expenses, like payroll and rent, even when cash flow is decreasing due to a change in operations or seasonal fluctuations.
- Build better business credit â Taking out a loan contributes to a positive business credit score as it improves the creditworthiness of the business. Business owners that make their monthly payments on time will earn a good credit score which can lead to more financing options and better repayment terms in the future.
- Loan options â There are more loan options available for small business owners than there are for personal loans. Businesses may be eligible for short-term loans, long-term loans, or revolving credit lines. Borrowers can shop different interest rates and repayment terms before deciding on the best type of loan.
- Decision Making â Choosing to take out a business loan instead of seeking partners or investors allows business owners to retain control over all aspects of their business. There are no requirements for profit sharing or shared decision-making with small business loans.
- Tax deductions â Borrowers often do not realize that if they pay interest on a small business loan, it may be tax-deductible. The IRS eligibility requirements for tax-deductible debt expenses should be reviewed when considering the funding options available to your business and used as a reference each year when filling out business tax returns.
Cons of small business financing
Small business loans typically improve the overall financial health of a small business, but just like any big business decision, there are some disadvantages to business financing too.
- Monthly cash flow â Business loans are required to be repaid, so the monthly payments made to pay down the debt will come out of the businessâs monthly revenues. Loans with higher interest rates typically have higher monthly payments, so before deciding on the right type of financing, be sure to analyze how the payment requirements will affect the businessâs monthly cash flow.
- Debt to Income (DTI) â Lenders and investors may evaluate your businessâs level of financial risk using the Debt-to-income ratio to measure what percentage of monthly income is spent on debt payments, like loans and mortgages. When shopping for the right funding option, consider calculating your DTI to see how the loan will affect your future ability to borrow funds.
What are the best types of business loans?
Before you start shopping for the best small business lenders, you may be wondering what types of business loans are available. Choosing the right financing option will depend on several factors including:
- When you need access to the funding
- The desired loan amount
- Your time in business
- If the business has good credit
- If the small business owner has bad credit
- The length of time youâll need to repay the loan
Discussing the above aspects of your business with a lender or business loan advisor can help you choose from the following types of loan options.
Business term loan
A term loan is a traditional source of small business financing where the borrower receives a lump sum payment upfront and repays the debt with monthly payments of principal and interest. Unsecured term loans are preferred by most entrepreneurs because they do not require any collateral or personal guarantees. However, some borrowers with less than perfect credit may opt to get a secured term loan where they provide temporary ownership of a personal or business asset to the lender. Term loans may be issued by an alternative lender or bank loans received from a traditional financial institution or credit union.
Equipment financing is a great way for small businesses to purchase the expensive equipment their company needs. Most business lenders or financing companies will work with a borrower to finance the entire cost of the equipment because the equipment acts as collateral for the loan. The repayment terms for equipment loans typically correlate to the useful life of the machine or equipment, so the interest rates and payment amounts are competitive.
SBA loans are a type of business funding backed by the U.S. Small Business Administration. The funds are issued by an SBA-approved lender, but the government backing benefits the borrower by allowing lower interest rates, smaller down payments, and flexible eligibility requirements. There are multiple loan programs through the SBA including the SBA 7(a), 504 loans, Microloans, and Express loans. SBA loans are available through traditional lenders or online lenders and the permitted use of funds may depend on the specific SBA loan program as well as the creditworthiness of the borrower.
Business lines of credit
Lines of credit are a type of revolving credit line, like business credit cards. The borrower is approved for a maximum credit limit which they can draw on whenever funds are needed. As the borrowed funds are repaid, the business owner can then access the funds again. A business line of credit can be used to cover cash flow fluctuations, make large purchases, or provide fast funding for emergencies. This type of financing is a great tool for individuals with new businesses to build a business credit history, which can help them secure larger financing in the future.
Other types of small business financing
The loan offers available to small business owners may also include the following financing options:
- Merchant cash advances (MCA) â Repaid by the business using future credit card or debit card sales, MCAs can fund as fast as same-day.
- Commercial real estate loans â Long-term financing option where the repayment terms mimic term loans and traditional bank loans
- Invoice factoring or Invoice financing â Funding available in 2-3 business days that uses unpaid invoices or a receivables ledger to repay the loan amount.
How to use business loan comparison sites to find a lender
Once youâve decided to explore the funding options available for your small business needs, youâll need to find the right business lender. Most loans come from traditional lenders, like banks and credit unions, or alternative lenders, like online marketplaces. The lender you work with to secure a business loan will influence the customer service you receive, the number of loan offers, origination fees, repayment terms, credit score requirements, the loan application process, and eligibility requirements. The challenge for some borrowers is knowing how to choose the right lender.
Calling several potential lenders and reviewing each websiteâs FAQs section can be time-consuming and leave an entrepreneur feeling overwhelmed, but a business loan comparison site is a great way to narrow down the search to one or two business lenders. On these sites, borrowers can view different loan pricing, the most competitive rates, the required minimum credit scores, the existence of prepayment penalties, annual revenue requirements, the availability of an online application, and more.Â
Some of the most reliable business loan comparison sites include:
The Consumer Affairs website list several different business lenders and gives a summary of each company. The summaries tell readers what types of financing options are available, the maximum loan amounts, and lists average funding times. The site allows borrowers to select multiple lenders and compare more loan details as well as read customer reviews. For example, Consumer Affairs rates Biz2Credit with 4.5 out of 5 stars and gives readers access to 803 reviews about the lender.
Funding hero gives readers a detailed summary of its lending partners. The site gives an overview, lists specific lender and loan features, and even breaks down repayment terms and eligibility requirements. Funding Hero is a great way to learn about an online lender and even contact them right through that site.
The Finder site is another easy-to-use website that helps match small business owners to the right financing option. The site lists several business loan providers and allows readers to select up to three options to compare details side-by-side. Biz2Credit is featured on the website and lists the annual percentage rates (APR), eligibility requirements, and loan amounts. There is also a âFinder Ratingâ listed for each lender, where the loan provider is rated out of five stars.
The bestmoney.com website is another reliable business loan comparison site. This site offers detailed reviews of several alternative lenders. In the reviews, the site explains the pros and cons of each lender, a snapshot summary, loan options, privacy policies, contact information, and links to thousands of real customer testimonials.
How to get approved for small business financing?
Whether you are opening a startup company or have several established businesses, there is a loan option that is right for you. Getting approved for small business financing begins with selecting the right lender and completing an application. From there, the lender will provide all the funding offers that your small business is eligible for. Once youâve selected the type of loan that meets your business needs, your lender can let you know how the approval process will work and when to expect the funds in your bank account. If you are looking for a loan option that will provide fast funding, there are some steps you can do to speed up the funding timeline.
- Gather documents ahead of time â The exact eligibility requirements for each type of loan are different, but there are some basic documents you can prepare ahead of time including bank statements, a copy of your business plan, business and personal credit scores, and credit reports.
- Select an online application process â Many alternative lenders, like Biz2Credit, offer an online application process. This eliminates the need for a scheduled appointment and helps your application get into the right hands quicker.
- Select a loan that can be approved and funded quickly â The funding time for each type of business loan varies. For example, SBA loans can take up to 90 days before the borrower receives funding, while business lines of credit may fund in as little as 24 hours. Your lender will be able to narrow down your loan options based on when your business needs the funds.
There are many benefits to small business financing but finding the right loan and the best lender to work with can be challenging. Business loan comparison sites are a great tool for small business owners to use when finding the right financing partner. Comparison sites allow borrowers to understand repayment terms, application processes, and read about other clientsâ experiences before reaching out to a lender.
Check out a comparison site today, it just may lead you to Biz2Credit, as it did Gauntlett Eldemire. Mr. Eldemire reached out to Biz2Credit when he wanted to expand his laundry business but didnât have the time to wait on an SBA loan approval. Biz2Credit was able to help Gauntlett get the funding he needed in the timeframe he wanted it.