At some point, most small businesses will reach a crossroads. Is this the time to borrow money for the company’s benefit, or is it a bad idea?
Cash is the lifeblood of any business. It’s needed to cover expenses, purchase equipment, and support day-to-day operations. Sometimes, you need an extra influx of funds to keep things going or finance a growth opportunity for your business.
Loans for small businesses can provide the means to deal with significant cash flow issues your business is facing. But they’re not without risk.
Knowing the pros and cons of small business loans will help you make the right decision for your company. Read below to understand how taking on debts may be good or bad for business.
Benefits of a Small Business Loan
A business loan (such as a micro-loan or a bank loan) can be a lifesaver for struggling companies. It can also give your business a much-needed boost to take it to the next level. Below are some of the pros of taking on a small business loan.
There are different types of business loans to address various needs. For example, you can use SBA loans to grow your capital or refinance your operations. A CDC or a 504 loan can be used for real estate or to purchase long-term machinery and equipment.
If the funding comes from an investor, they will have a say on how you can use the money. They may impose restrictions on where or where not to allocate the cash.
2. No Need to Share Profits
Getting a business loan means that you’re not diluting your equity as opposed to receiving money from investors. An investor will take a piece of the pie, including the “pepperoni” or profits you love.
You can retain all your profits when taking on a business loan because creditors aren’t entitled to profit sharing.
3. Can Be Less Costly Than Other Means of Acquiring Funds
Interest payments on small business loans are counted as an expense, thus tax-deductible. That’s why borrowing money from banks or other sources is usually less expensive than equity financing.
Also, if you make payments on time, you can improve your business’ credit score. This helps you get a lower interest rate for future loans you might need.
Disadvantages of Loans for Small Businesses
Getting a loan doesn’t come with no strings attached. Some of the problems you might encounter include:
1. Repayments Affect Your Cash Flow
Instead of helping your cash flow, there’s a danger that debt repayments can disrupt it instead. This becomes apparent if your business relies on loans too much.
When you spend most of your profits paying debts, your business can stall. And if it comes to the point that you’re defaulting on payments, you may lose any asset that you put up as collateral to secure the loan.
2. Interest Rates Can Be High
Lenders prefer to give loans to less risky ventures because they want to be repaid on time. If your business is less established or has a low credit score, you might find it hard to secure a loan with affordable rates.
Loans for small businesses can be a boon for your company, but they can also be a bane. Therefore, it’s crucial to have the right reasons to take on loans. Always ensure that your business can handle the repayments you’re obligated to pay.
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