Pros and Cons of Small Business Loans: Steady Growth

Microloans

These loans are a subcategory of SBA loans in some way and they are given to newly established start-ups or small businesses, including non-for-profit childcare centers. SBA makes the fund available to nonprofit community-based lender up to a maximum of $50,000 per borrower. However, the average loan size is substantially lower at $13,000. 

Microloans can be particularly beneficial if you’re a veteran or you can claim membership in any category other than the traditional “straight white male” small business owner. We can argue the politics of it some other time; for now, it’s a wonderful opportunity for traditionally underrepresented entrepreneurs to kickstart their vision.

Even if you are a straight white man, it could very well be worth looking into the Microloan program anyway. There are all sorts of factors which might mean you qualify.

Line of Credit Loans

These loans operate in many ways like a credit card for your business. (In fact, many small businesses choose to utilize a company credit card to accomplish the same thing.) The application process is similar to any other small business loan, but once approved, you only withdraw the amount you need at that moment. You can spend as much or as little of the total available in whatever way you like as long as you make the required minimum payment each month.

The major advantage of a line of credit loan (or small business credit card) is that you’re not paying interest on the money you haven’t spent yet. You don’t have to do everything at once to make effective use of your line of credit – you can pay as you go. Repayment is based on the total amount utilized so that monthly obligations can be managed through the strategic timing of your spending. Unlike a traditional loan, every time you make a payment lowering your balance, those funds become available for you to borrow again as needed.  

The potential disadvantage is one familiar to any credit card user. Unless you pay attention and avoid letting your balance swell month after month, it’s easy to spend more than absolutely necessary and to let your balance and monthly interest payments pile up. It’s often harder to qualify for a line of credit loan than for a more traditional small business loan, but thanks to the proliferation of online lenders, this is no longer as true as it used to be. Interest rates largely depend on your credit history, but as you continue to meet your repayment obligations, you put yourself in a position to secure better and better terms.

Invoice Factoring / Invoice Financing

Both invoice factoring and invoice financing rely on your small business’s outstanding invoices as “assets” or “collateral.”

With factoring, the factor (they’re not officially considered “lenders”) purchases your outstanding invoices at a discount and takes on the responsibility for collecting those balances. You get the cash and they profit only if they secure repayment on their own. The downside is that you’re giving up a sizeable slice of revenue in exchange for rapid access to the funds. Not every customer is thrilled to discover they’ve been “handed off” to what sometimes seems like a collection agency (but isn’t).

Invoice financing, on the other hand, is an actual loan for which repayment is guaranteed by your outstanding invoices. The money currently owed to you by customers becomes security for the loan. As with factoring, however, you tend to sacrifice a higher percentage of your revenue in order to get what’s left more quickly. This can give you the pliancy you need to navigate difficult periods, or it can inject increasing instability into your business as you scramble to get back on top of your profits.

Investors / Partnerships

The ideal scenario is for some rich uncle or weird acquaintance from college to hear about your efforts to start your own business and offer you a blank check to get in on the action. These “angel investors” provide working capital with minimal interference in exchange for a reasonable return when and if you become wildly successful.

More commonly, you might consider taking on investors or even forming a partnership in order to combine resources. The pros and cons of this have been covered elsewhere, but basically you’re giving up a little (or a lot) control in exchange for better funding.

Kickstarting / Gofunding / Online Campaigns

The 21st century has introduced a wide range of options for pitching your ideas to others and giving them a chance to chip in on your dream. The rules vary from site to site, as do the pros and cons. In general, however, these sorts of sites work best for specific projects or limited goals. They’re not really set up to sustain an ongoing operation in a meaningful way.

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”.

Conclusion

These are challenging times for many people, and for small businesses in particular. But that doesn’t mean it’s not possible to succeed in the face of those challenges. The right financing and effective strategizing can propel you forward while so many others are still trying to figure out how they ended up so far behind.

Goalry has never been about telling you what’s best for you or your business. We prefer to offer insights, tools, and connections to the sorts of financial options which were only available to a handful of insiders a generation ago. The Goalry blogs break down complex financial ideas into easy-to-understand terms with practical examples. The Goalry App makes it easy for you to track your various accounts, categorize your small business spending, evaluate investment options, compare insurance companies, and conveniently navigate dozens of other fiscal decisions all in one central location.

Life is complicated enough without having essential information and tools scattered all over the internet or divided up into countless hiding places. Some are experts in dentistry, others know their chemistry, history, optometry, or podiatry. You may excel at microbrewery, puppetry, or archery. We’re all about goals – hence the name: Goalry.

Whether your goals are, short-term, long term, personal, financial, or whatever else you decide is important to you, we’d like to help you get there. Dreams are wonderful, but steps are what move us towards them. At Goalry, our priority is to help you take more effective control of your personal or small business finances – to get focused and stay organized so that you can better accomplish whatever your goals happen to be. Sometimes that’s weighing the pros and cons of small business loans, other times it might mean evaluating the benefits and risks of refinancing your mortgage or helping you figure out how to start saving for retirement when you’re already worried it’s too late.

Whatever your goals – and whatever’s stopping you from reaching them already – let us help. They may be closer than you think.