Pros and Cons of Small Business Loans: Steady Growth
Can we talk shop for a moment?
I know you’ve been wondering if it’s time. Is it time to get serious about that home business you keep wanting to try? Is it time to expand that part-time work you actually like more than your “real job” so that maybe it becomes your “real job”? Or is it time to hire actual employees for that store front you’ve been managing by yourself or with your spouse? Maybe add some equipment? Increase your inventory? Expand your services? Are there small business loans out there for situations like mine? How should someone like me even approach business loan shopping?
I’ve wondered some of the same things.
The Unique Challenges of Small Business
It can be frustrating, trying to explain your vision to people who aren’t entrepreneurs. They don’t get it, because in their worlds “playing it safe” is always the answer. And for them, maybe it is. Maybe it always will be.
I’m thankful for those friends and their ability to be content with that. They’re hard workers and great people and we love and value them.That’s just not me. Maybe you’ve been wondering if it’s just not you, either.
Maybe you’ve been toying with the idea of starting your own business, or taking your current hobby to the next level. Or perhaps you’ve already established yourself as an entrepreneur. You’re working out of your home, or you have your own shop, booth, or stall, and you’ve learned some of the hard truths of business finance. I’ve known successful business owners who spent years working out of their truck and their garage. For you, the question may not be whether or not to take the leap, but whether to make the next one longer and higher than you’ve tried before.
Whatever the exact status of your business, your hobby, your passion, small business owners (or those who wish to be) are at something of a crossroads right now. In many ways, you hear, the economy is active and strong. Small businesses are on the rise. At the same time, working for other people no longer seems to offer the promise it once did over time. Some of you have read this in the financial pages; others have experienced it yourself in far too personal terms.
Leaps and Lurches: The Search for Steady Growth
So what should you do? Is it time to jump, or better to play it safe and see how things unfold in upcoming months and years? Is it possible to take small but significant steps forward without unnecessary risk? How can your business plot a course for evolutionary growth? For expansion instead of explosion?
If you want to grow, or get serious about changing course or starting something entirely new, you’ll need resources. That’s not a problem if you have a wealthy relative ready to finance your efforts out of familial affection or the hope of a small cut of the profits down the road, but for the rest of us that means taking out one or more small business loans. It means risk, and commitment, and making endless decisions – many of which we can’t even anticipate yet. It means consequences – good ones, bad ones, and some which may be both.
I can’t tell you what the right call is for you in your situation right now. I wish I could. I’d make a fortune advising folks just like yourself when to wait, when to leap, and when to step cautiously ahead. Plus, I’d be wildly popular and everyone would come to my parties just to hear me pour my wisdom like champagne, only twice as bubbly.
What I can, do however, is help you revisit some of the pros and cons of small business loans and suggest a few things to consider as you shop business loans. Then, if you decide to move forward, we can help connect you with online lenders ready to compete for your business. What you do after that is entirely up to you; that’s how running your own business works, after all!
Before exploring the various types of small business loans or the specifics of business loan shop, the most fundamental question is whether or not you really want or need a small business loan. What are some good reasons to shop business loans to begin with?
Feeling a bit snug where you currently operate? Finding it difficult to display your products or promote your services? Do your employees have to take turns with the community desk and chair? Perhaps it’s time to move or add some square footage to your existing location.
Maybe the solution isn’t making your location bigger so much as making it the first of several. Is it time to add locations in nearby cities or utilize multiple locations for maximum efficiency? Explore your options, but don’t be afraid of taking this leap if the numbers justify it.
If your business involves selling products utilizing a large variety of materials, you know the importance of having the right goods on hand. In this age of next-day delivery and immediate gratification, fewer and fewer customers are willing wait for you to order in their preferred colors or replenish whatever supplies are required to serve their specific needs. Or, if your business is seasonal, you may regularly experience “feast-and-famine” cycles which could make periodic small business loans a practical element of your overall business financing.
While you don’t want to borrow money to meet payroll on a regular basis, initial expansion of human capital may require some upfront investment. There are interviews to conduct and salaries to guarantee – not to mention you’ll need somewhere to put them once hired (see above).
There’s no sense buying something just because it’s shiny and new, but if your business uses special equipment or manufactures products, it makes even less sense to fall behind your competitors. Chances are no matter what sort of business you do, you’re using one or more computers, smart phones, and other technology. Don’t upgrade just for bragging rights, but make sure you have reliable, efficient tech if you want to remain competitive.
Maybe everything has gone magically for you since day one; kudos to you if that’s your story. For most of us, however, our journey has included some wrinkles along the way – some “downs” which make the “ups” that much more fulfilling. Our credit report probably reflects this range of experiences (hopefully telling a story of determination and recovery as much as risk and periodic reward). The time may come that your business would benefit immensely from access to substantial credit. Don’t wait until that day to shore up your credit history; small, reasonable small business loans now, paid back in a timely and consistent manner, can lay essential groundwork for those moments.
What To Look For In Small Business Loans
If you’ve decided that now is a good time to grow your business, and that a small business loan is part of that, it’s time to break down the basic elements you should consider as you begin to shop business loans. Sometimes it helps to step back and start from scratch in order to think clearly about the right choices for your business and your circumstances.
How Much Do You Need?
If this sounds like an easy one, you haven’t thought it through enough. Take out too little, and you’ve put yourself in debt without doing what you set out to do. Take out too much, and you risk overextending yourself unnecessarily. At best, you’ll be paying back interest on money you didn’t really need. There’s no perfect answer to this one, but run the numbers several ways and get as close as you can before reaching out to business lenders. Be ready to explain to them how you arrived at your total if asked.
What Kind of Collateral Is Required?
Depending on your credit history, your relationship with the lender, and the purpose of the loan, you may be asked to put up collateral on your small business loans. This would be something of value you’re offering to the lender in case you are for some reason unable to repay your loan as scheduled. Don’t take this part lightly. Your home or business may provide ample collateral and allow you the resources you need to grow. They may even help you secure a better interest rate. But if you’re unable to repay your loan for any reason, you risk losing whatever you’ve put forth as collateral. That’s not how the lender wants it to go down, and I’m certain it’s not what you want, but it happens. Think through the ramifications before you sign.
What Interest Rate Can You Get?
Your interest rate is largely a function of your business and personal credit score history, but there’s no need to be discouraged if you don’t have perfect credit. Different lenders use different factors to determine what they’ll offer you. This is one of the biggest reasons you should look at multiple lenders. Try your local bank or credit union, but it’s the 21st century – try a few reputable online lenders as well. Pay attention to the specifics of each (not just the interest rate) before you decide, but I suspect you’ll be pleasantly surprised by some of the online options that didn’t exist for small business loans a generation ago. You may decide to accept a higher interest rate now to begin rebuilding your credit record so that you can negotiate better terms down the road.
What’s the Length of the Loan?
This is another balancing act. You want to keep your payments manageable, and longer terms certainly help with that. At the same time, a 48-month loan will cost you more than the 24-month version, even if the interest rate is the same – which it probably won’t be. If you need that longer-term option and the lender offers it, great. But if you can reasonably pay back the full amount in three years instead of five, you’ll save substantially on total interest paid. Some longer-term loans are particularly difficult for newer businesses to secure and lenders may require additional documentation or security for the loan (see below).
What’s the Late Payment Policy?
No one plans on paying late, but we should be honest about the possibility over a period of several years. What’s your lender’s policy about late or missed payments? Are there extra fees, or just additional interest? At what point do they consider the loan in default? You should pay back every loan in a timely, professional manner, but you may find substantial variations in how different lenders treat minor inconsistencies. Better to know up front just what these are.
Are There Penalties For Early Payments?
I know – who could possibly object to you paying your loan back early? With most traditional business loans this isn’t a problem, but you should clarify up front whether extra payments automatically go towards the principal of the loan or will simply be counted towards next month’s scheduled payment. If your lender does invoke some sort of penalty for paying early, you’ll want to consider that before you commit. This factor alone might shape who you choose for your small business loans.
Small Business Statistics
Interesting Small Business Statistics:
- 69 percent of entrepreneurs in the United States start a businesses from home.
- According to the National Association of Small Business’s 2017 Economic Report, the majority of small businesses surveyed are LLCs (35 percent) followed by S-corporations (33 percent), corporations (19 percent), sole proprietorships (12 percent), and partnerships (2 percent).
- Out of the 50% of those asked, “What’s the best way to learn more about entrepreneurship?” responded with “Start a company”.
In 2018, the most popular small business loan methods were:
- Personal funds 77 percent
- Bank loan 34 percent
- Borrowing from family/friends 16 percent
- Other funding 11 percent
- Donations from family/friends 9 percent
- Online lender 4 percent
- Angel investor 3 percent
- Venture capital 3 percent
- Crowdfunding 2 percent
Short-Term Small Business Loans
These are loans usually scheduled for repayment in a relatively tight time frame – from several months to several years. They’re somewhat comparable to buying a car. It’s still a lot of money, but it’s doable, and in a few years, if you keep up as you should, you’re clear. If you’re trying to build your business credit history, these are where you’ll start. Some lenders require short-term small business loans to be tied to specific purposes – purchasing equipment, expansion, inventory, etc.
Short-term loans tend to be for relatively small amounts, although what that means will vary widely with the type of business you own. While your credit still matters, lenders are more likely to take a chance on small business loans scheduled to pay off over a shorter term. Some forms of these loans dramatically differ from your car payment by being scheduled for repayment in weekly, or even daily, amounts. It all depends on the terms you work out with your lender.
Long-Term Small Business Loans
Most of the time, small business financing for gradual growth will involve relatively short-term loans of manageable amounts. There are circumstances, however, in which you may need to shop business loans for much larger amounts and for longer periods of time. If you’re building new locations or purchasing expensive equipment, the investment required may not be something you can reasonably repay in four or five years. If short-term loans are somewhat like buying a car, long-term business loans are more like buying a house.
I suppose we’d all love to have this sort of problem – so much growth that we have to start business loan shopping just to keep up. Perhaps, then, we should take a moment and consider a few of the realities of longer-term small business loans and what you need to know going in.
Long-term small business loans aren’t usually tied to specific purchases or purposes. They may be taken out to cover a variety of needs while your business establishes itself or grows. Just because the lender may not require proof of specific purchases doesn’t mean you shouldn’t have a good idea where the money is going before you sign up, however. While it’s impossible to predict all factors with certainty, you should have a fairly detailed business budget broken down into a spreadsheet – for your own reference as much as anything.
How will this loan help you move forward? How will it make you more profitable, enabling you to pay back the loan and still come out ahead over time? Just like in our personal lives, even large amounts of money can suddenly disappear quickly if we’re not fully intentional about where each dollar is going.
Features of Long-Term Small Business Loans
Most traditional lending institutions like banks and credit unions are going to have fairly rigid requirements for long-term small business loans. Your credit score will be a larger factor, and most will have minimum amounts you must borrow to qualify for extended financing. While you’re generally expected to arrive with documentation demonstrating your personal credit worthiness and your business’s ability to pay back any loan, the paperwork requirements will be more extensive for a long-term business loan. It’s unusual for traditional lenders to extend long-term loans to new businesses or any small business unable to document several years of substantial profitability and a clear plan for growth in the near future.
Online lenders are more likely to demonstrate flexibility both in terms of minimum amounts required to take out a long-term loan and their willingness to work with newer businesses. It will probably not surprise you to hear that we’re big fans of online business lenders – but we’ll come back to that in a bit.
Interest rates on long-term loans
Interest rates on long-term loans tend to be a bit lower than for shorter-term loans, which is great but not the money-saver you might expect. The extended terms mean you’ll be paying more over the life of the loan than you would with a much shorter-term loan at a higher interest rate, even if the amount borrowed were comparable. That’s not necessarily a bad thing; it makes sense that it costs a bit more to borrow larger amounts or for longer periods. Still, it’s always a good idea to run the total amount you’re likely to repay under whatever terms you’re able to secure. Thankfully, it’s the 21st century and there are free online loan calculators available for you to experiment with zero risk and no one even watching.
As with a house payment, the most traditional repayment schedule for long-term loans involves monthly payments. You may be given the option of fixed-rate interest or adjustable-rate interest. Fixed-rate, as the name implies, means the interest rate established at the birth of the loan remains the same throughout repayment, whatever happens to market rates in the meantime. With an adjustable-rate loan, the interest on your repayment varies with market rates – it might go up or down from month to month, a little or a lot. Given the nature of long-term loans, some lenders are more likely to push this option than they are with shorter term.
Why Look For Business Loans Online?
No one is suggesting that you only consider online options for your small business loans (or any other sort of loans), but part of making responsible business financing choices is being aware of and weighing your options. In fact, I’d suggest starting with local options – the bank down the street, the credit union you belong to through your spouse’s work, etc. Set up an appointment to talk about your business and their loan options. See what they offer you.
Then explore your online options as well. As I said before, this is the 21st century, and while some things about entrepreneurship have remained the same, other realities are evolving because of technology, changing political dynamics, and the evolution of the modern economy. If you haven’t tried online lenders before, let me suggest a few reasons maybe you should.
Online lenders aren’t bound by the same traditions or conservative lending culture typical of most banks and even many credit unions. Because they exist primarily as lenders (rather than as institutions geared towards savings or investment management or large safes full of bullion), they very much want to lend you funding – small business loans, personal loans, auto loans, mortgage loans, etc. It’s literally what they do. Some will allow longer terms on smaller loan amounts, or creative payback schedules based on the specifics of your business. Others will work with you on revolving credit or new equipment loans so that the terms of the loan accommodate your unique business realities. Online lenders have the freedom to be more creative when it comes to specific terms because lending isn’t peripheral to their primary function; it is their primary function.
You’re in business (or trying to be), so you understand how business works. Online lenders only make money when they loan money and that money eventually gets paid back with reasonable interest. While your credit report and other indications of your ability to repay certainly matter, online lenders have different thresholds for determining acceptable risk. In other words, they’re more likely to “take a chance” on a determined young entrepreneur or a hard-working small businessman trying to move her company to the next level.
Let’s be honest – no matter where they’re located or how comfy the chairs, driving from institution to institution, signing in on that little e-pad at the door, then waiting to talk to a guy in a suit who seems to be typing in way more information than you’re actually sharing, is seriously time-consuming when you’re trying to also run a small business and have a life at the same time. Working with online lenders allows you to do everything from the comfort of your office or home and access multiple options all in one sitting. While specifics vary, online lenders often require less paper documentation, so while you’ll absolutely want to have all the same information prepared, there’s less time devoted to photocopying or filing hard copies in manila folders (and zero stamping on things with big rubber ink stampers).
That’s where we come in. At Loanry, we gather some basic information from you, then connect you with one or more online lenders we believe to be a good match for your needs. There are no fees, no surprises, no point in the process we suddenly pressure you to buy something or upgrade to our “pro” version (it’s all the “pro” version and the “pro” version is free). Connecting lenders and borrowers is what we do – and, at the risk of sounding rather proud of our track record, we do a pretty good job of it.
Let us know when you’re ready, or if you have any questions. We’re always here.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.