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The Pros and Cons of Loans: Small Business Lending

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Entrepreneurs with established businesses may also need a sudden influx of cash to keep operations going. Whether it’s a slow sales season or the desire to expand your operations, your business may not have enough cash flow to cover unexpected major expenses.

One option you can explore to cover major cash flow issues is taking out a small business loan(SMB). While this isn’t the only choice for an entrepreneur in need of funds, it’s certainly worth looking into to see if it suits your needs.

Not sure how to proceed with a small business loan? Read on for details so you can make an informed decision about the advantages and drawbacks for small business loans, what you need to apply for one, and additional tips to help you move forward with this funding option.

What are small business loans?

Small business loans are funds borrowed from a lender like a bank that must be repaid with interest. And it’s one of the most common ways to fund a business. A recent study from the U.S. Consumer Financial Protection Bureau showed that small business lending is quickly expanding—in 2017, data estimated the market had reached $1.4 trillion. The agency report also showed that credit from banks accounted for 36%—or $504 billion—of that number.

Small business loans are typically lower interest (especially compared to credit cards) and offer more flexible terms than many other typical loans. You can approach a traditional financial institution like a national bank to apply for one of these loans, or you can lean on more local sources such as a nearby credit union.

Are small business loans right for your business?

While small business loans are one of the most popular funding options available to entrepreneurs, like any form of borrowed money, they boast a number of pros and cons.

Advantages of small business loans

There are plenty of reasons that many entrepreneurs lean on small business loans to start or grow their operations, including:

  • Convenience. Every town has a bank or financial institution, and there are also many online lenders that offer small business loans. That means it’s convenient and relatively easy to approach a lender for this type of funding.
  • Businesses can access large amounts of capital. Depending on the type of small business loan and the intended purpose for the funds, entrepreneurs can borrow large sums of money to start or run their business. For example, the U.S. Small Business Administration (SBA) showed that the average amount business owners borrowed through its 7(a) loan program in 2016 was $417,316. That average amount ballooned to $600,000 for small business loans from national banks in 2016.
  • Lower interest rates. Business owners with good credit scores can typically get a relatively low borrowing rate on small business loans. The interest rate will depend on the amount borrowed, the entrepreneur’s credit score, and a few other factors, but traditional lenders like banks or credit unions usually offer annual percentage rates (APRs) ranging from 4% to 13%, while online lenders can have APRs from 7% to over 100%. Compare that to average credit card interest rates, which were around 19.88% for borrowers with good credit in 2018.
  • Different types of loans for different needs. Not all small business loans are created equal. There are a handful of different loans to meet a variety of needs, which is a boon for small businesses. For example, SBA 7(a) loans and SBA Express loans can be used for a wide variety of purposes, including growth capital and refinancing. For real estate or heavy equipment or machinery, entrepreneurs can lean on CDC/504 loans. The SBA also works with a variety of nonprofits to offer microloans for amounts ranging from $1,000 to $50,000.
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