Small business loans help entrepreneurs establish their operations and support existing companies in their growth plans. A small business loan can help you invest in equipment or give you working capital to expand your operations. As your company makes money because of the loan, you will pay back the funds through a series of agreed-upon terms.
Multiple organizations and creditors will issue small business loans. As you search for loan options, know which factors to consider so you make the best choice for your organization. You will want to consider criteria like the cost of the loan (interest), how soon you can access the funds, and the rate at which the lender expects you to pay them back.
Get to know some of the loan options available to your business and the pros and cons of each. This guide can empower you to make the best choices possible to succeed.
Term Loans
Term loans are standard loans issued by banks, credit unions, and other financial providers. These lenders will give you a lump sum of money and you will pay them back at a monthly fixed rate over time.
If you have business credit because your organization has been operational for a few years, you can take out a business term loan. If you are just building your business or launching your startup, you might take out a personal term loan using your own credit score and financial statements.
Pros and Cons of Term Loans
One of the main benefits of taking out term loans is you can decide how much money you borrow. As long as the lender approves the loan and you can handle the monthly payments, you can get the working capital you need. Many business owners also appreciate the fixed monthly payments because they can plan for this expense each month.
Some of the drawbacks of term loans include their cost. You might have a high annual percentage rate (APR) that makes accessing your money more expensive than you thought. You also might need to borrow against existing assets as collateral. This makes the loan riskier if you cannot pay it back.
SBA Loans
The U.S. Small Business Administration (SBA) is a government agency that is responsible for supporting startup companies and small businesses across the United States. The SBA works with lenders to help owners and founders secure loans with favorable interest rates. Loans range from $500 to assist with working capital up to $5.5 million investments to expand your operations.
You can work with the national SBA to get paired with lenders or reach out to your nearest SBA chapter to learn about your funding options and other educational resources. Even if you don’t get an SBA loan, this organization offers educational opportunities and programs to support small business owners.
Pros and Cons of SBA Loans
There are multiple reasons to work with the SBA to secure financing for your business. The loans might offer more favorable terms than if you worked with private institutions because the SBA reduces risk to creditors by guaranteeing the loans. Loan sizes also vary based on your needs, so you can get the right amount of capital for your business.
There are two main drawbacks to working with the SBA to get a loan. This organization has strict eligibility requirements, so you might not get the loan for the project you need. Additionally, the application process can be difficult. It is often harder to work with a government body than with a private lender.
Stock Loans
If you have invested in publicly traded companies, you might be able to borrow against your shares through stock loans. Through this lending option, your stocks are used as collateral to secure the loan. You are not selling your stocks or liquidating these assets, instead, you’re using them to prove your borrowing power. Once you pay back the stock loan, you will retain full ownership of your shares.
These loans are frequently issued to people who invest in the NASDAQ, NYSE, or OTC markets. Typical stock loans range from $50,000 to $5 million. This could be a good way to get large-scale capital for your organization.
Pros and Cons of Stock Loans
One of the main benefits of taking out a stock loan is that you can use your existing assets as collateral. This means the funds are issued through a secured loan and you might get better interest rates as a result. Additionally, you don’t risk losing any business assets that are essential to your operations if you cannot pay back the loan.
The main drawback of this option is that you need to have shares to borrow against. If you aren’t actively investing, you might not be able to take out one of these loans.
Use a stock loan calculator to estimate how much you can borrow based on your existing shares. This can give you an idea of your loan amount.
Equipment Loans
Equipment loans provide financing for tangible items that are essential to your operations. Equipment needs vary from one company to the next: a farmer might need a tractor while a tech company needs computers and office furniture. Even items like kitchen equipment for your employee break room and HVAC units to cool your building can be procured with equipment loans.
Some lenders specialize in providing equipment loans to businesses. There are even industry-specific lenders, like agricultural creditors that support local farm owners.
Pros and Cons of Equipment Loans
Equipment financing is a good way to build your business credit while purchasing assets for your organization. This can help you secure other loans at favorable rates in the future. These are secured loans because you are borrowing against the equipment as collateral, which means you could get a low APR that makes the purchase more affordable.
An equipment loan is a limited form of financing, which means you can only use it for specific items. Additionally, there is a risk that the loan outweighs the lifespan of the asset. If you buy a computer with an equipment loan and the device breaks within a few years, you still have to pay back the money you owe.
Microloans
Many business loans require you to have either collateral or a high credit score, whether it’s a personal or business credit score. If you do not have any assets or good credit to borrow against, look into microloans. These are small loans that are traditionally issued to people with poor credit. They allow you to secure financing for your business and you can improve your credit score by paying them back over time. Microloans also usually have shorter terms because they are smaller.
Pros and Cons of Microloans
Microloans provide opportunities for financing to business owners who would otherwise struggle to get the capital they need. These loans are also usually easier to pay back because the borrower isn’t taking on a lot of debt.
One problem with taking out microloans is that you will have higher interest rates because this funding option is used by businesses that can’t otherwise procure funding. Your loans will cost more, limiting your access to money to cover other operational expenses. Microloans also limit how much you can borrow, so you might not have as much capital as you need.
Small business loans can give you the operational funds you need at fair rates. However, you still need to do your research to make sure the loan terms and payment agreements are favorable for your business. Use the options above to find the best funding available.
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