There is a whole slew of reasons a small business would need credit. A small business loan solves the issue of a lack of capital. It allows a small business to scale, grow, and evolve by removing lack of funds as the obstacle.
In 2016, nearly 70% of all small businesses used a small business loan.
That said, the odds are favorable that your small business will at some point, need a loan.
Why A Small Business Loan?
Because small business loans are one of the top contributors to growth. It allows the business to scale by producing product faster, or even buying competitors.
Typically, small business loans are most often used to purchase equipment. But they can be used for any business related needs that would serve to improve the health of the business.
Clearly, loans need to be paid back. So taking out a small business loan is a bet on you and your business. That’s not something any small business should take lightly.
Some small business loans can be tough to get approved for. Your small business credit will matter a lot in the event you do apply. If you’ve read my small business credit guide, which is linked in the sentence prior, then you are probably already prepared to find financial credit suitors!
But what type of small business loan would you get?
Small Business Loans: Types
There are a few different types of small business loans.
This is the most popular small business loan type. That’s also because its the most generic.
A line of credit for a small business is same in concept to a line in credit on a personal basis. It’s essentially a credit card for the small business. The revolving credit account, once approved by the lender, can be used by the small business to purchase and fund numerous business undertakings.
Purchase development needs, hardware, marketing infrastructure, or even equipment. If its business related and allows for credit card purchases, its fair game.
This is, as you might assume, a small business loan that’s tied directly to the purchase of equipment. This could be an expensive T-Shirt printer, or any number of other equipment needs a small business may come across.
Typically, the borrower should expect to pay 10% down (at least, depending on your small business credit and the lender’s stipulations).
This loan type is used to buy or refinance commercial property for the small business. You can expect to pay up to 1% higher in rates when compared against personal mortgage rates.
Small Business Loan Pitfalls
There are two major pitfalls when it comes to taking out a loan for your business. Neither is a surprise.
Not Being Able To Pay It Back
This is pretty obvious. If you can’t pay loans back, your small business will be exposed to the potential risk of bankruptcy. Once you file bankruptcy, you are no longer able to get funding for anything unless it comes from private sector lenders. And good luck with that.
Always make sure you can pay your loans back. Do your best due diligence.
If you do your research and have a business plan, you will greatly decrease your exposure to risk. And that’s what really matters.
Not Getting Approved
We touched on this earlier, your small business credit will be hugely important. But your business concept also matters. If you want a $50,000 small business loan to fund your lemondade stand in your neighborhood, I doubt you make headway with any lenders.
If you currently have bad credit, it might be wise to delay applying for any loans until you make the needed changes to your credit profile. You don’t want to get slammed with high interest rates if you can possibly avoid it.
If you can’t wait, do your research and proceed with caution.
Small business loans are the fuel for businesses. This is how they scale and grow. The ability to acquire extended credit is vital for the survival and evolution of a business.
But not being able to pay back a small business loan is extremely harmful to the business. As is having poor small business credit. Its important to be responsible when taking out credit and loans. They can be as harmful as they can be beneficial.