Small Business Loans Explained
Small Business Loans
There are many reasons why you might consider a business loan to fund the growth of your business. While this form of funding requires you to repay the loan with interest, it does not grant the lender any ownership over your business, unlike equity funding. This article will explain the different types of business loan funding, their risks and benefits, and if it’s suitable for your business.
Business loans and alternative funding
There are many types of funding you can turn to when growing your business. You are likely familiar with the terms “Equity” and “Rewards-based” funding, which are very popular methods of seeking investment; however, they’re not for everyone.
Equity and Rewards-based investors expect something in return for their money, such as owning a percentage of the company or receiving exclusive perks respectively. The exchange that occurs between the business owner and business loan providers, however, is a finite one: a repayment of the loan with interest over a specific period relative to the type of loan you have applied for (usually accompanied by collateral). This can be an intimidating feat but it works well for business owners who do not want to give a portion of their business away or create exclusive perks.
Business loans are very popular amongst start-ups and small businesses, but many loan applications require a business to have at least 3-years of trading with a strong source of income – so do your homework to see who will help you grow your business. Remember, lenders want to have their money back, so they need to know that you have security to cover the loan – collateral.
Business loans require the business owner to apply for a loan — whether it be from the government, bank, friends and family, or investor — to be repaid at a later stage. As previously mentioned, repayment periods depend on the type of loan you have applied for, such as short- or long-term, which we will explore shortly. If you need money as soon as possible to resolve a pressing issue, you may want to consider a long-term loan. You can apply to receive a large sum of money to be repaid in a few years as you work your way towards your monthly payments.
Before you can get your money, lenders may want to know:
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Your previous business performance.
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Your personal financial situation.
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If you have any county court judgements.
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Assess your previous experience as a business director.
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Your industry.
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Supply Chain.
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Your business plan.
Remember, businesses can wait for weeks to get approved, but this is worth it for many business owners. One of the most appealing aspects of business loans is that they allow you to use your money for most things your business requires. So it’s time to start making those business dreams come true. But, remember to be mindful of the risks along the way.
Benefits
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Minimal limitations to how you spend the money.
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No one owns a share of your business, therefore you have full control over your company and its funds.
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You don’t have to undergo the same pitching method with loan investors.
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Applying for a loan requires previous experience as a business owner, bank statements and your business plan. Sourcing funding through Venture Capitalists or Angel Investors, on the other hand, means gathering your pitch deck, campaign video and finances to present to many people, which can be more troublesome for some business owners.
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Risks
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You have an obligation to repay the loan.
Repayment can apply even if your business fails or does not meet its forecast targets.
In this case, your company’s liquidation will pay the remainder of the loan if it is not a government grant.
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High-interest rates
Short-term small business loans often have higher interest rates.
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Waiting to be approved for a business loan can be a lengthy process.
Waiting for your loan’s approval can take time you might not have.
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There is no guaranteed loan approval.
Waiting weeks on end for approval can be very frustrating and tiresome, especially if this is your only desired source of financing.
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You are likely to have to provide collateral against the loan.
Each loan is also noted on your credit rating.
Let’s explore the different types of business loans.
Short-term business loans (1-12 months)
Short-term business loans are optimal for small businesses looking for a quick loan with a shorter repayment period.
Benefits:
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When accepted, money is soon deposited into the business’s bank account.
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You can solve urgent issues quickly.
Risks:
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Expect to see high-interest rates.
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Budgeting your finances and determining how long you need the money is vital in repaying your loan.
Long-term business loans (up to several years)
If you need money and don’t have the means to repay the loan swiftly, this long-term option is for you. This loan allows you to take advantage of the longer payback period (up to several years) and focus on your business at the same time.
Benefits:
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You can take care of larger business expenses throughout this period.
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Repayment amounts are low.
Risks:
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It can be very difficult to qualify for, particularly for smaller businesses.
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Only businesses over 3 years old with a strong income are generally approved.