Pros and Cons of Business Loans
Survival for a business in today’s world has, without a doubt, become even more challenging with time. With technology improving at a progressive rate, many small businesses find it hard to compete in the market and emerge victoriously. Even after outmaneuvering the competition, many businesses still face considerable trials that they must go up against. Some of them include overcoming bottlenecks in their operations, and others might face redundant technologies and machinery which needs to be replaced with better and enhanced upgrades.
However, the greatest difficulty many small businesses face is sustaining their profitability in both the short run and in the long run. This makes business owners decide to take on considerable risks, which, if they don’t pay off, can break their willpower to advance any further. The circumstances can be unfortunate as this can bring the business to come to a halt or an immediate collapse. Before that happens, every establishment has a choice to seek out business loans, which is their only reliable option as it can ensure fruitful results. These can be both secured and unsecured business loans, and there are several other different types available as well. Many of these business loans are ideally sought after as a way out for entrepreneurs to meet with current hurdles that they are facing and try to deal with them. However, there are always some pros and cons involved. Listed below are the pros and cons of some of the popular types of business loans. So let’s take a quick look at each one of them:
Business Line of Credit
Works similarly like a credit card once you get approval. Businesses can apply for a line of credit that allows them to draw out money from the lender, and this can be done whenever your need arises. After repaying the withdrawn amount, you can make more withdrawals. The interest is charged on the amount of money you borrow. Generally, repayment terms can be from anywhere between six months to a year.
- Great for dealing with unforeseen emergencies due to its flexible funding nature.
- Approval times are quite fast.
- APR rates are lower when compared to other loan types.
- Suitable for businesses that have low credit scores.
- If payments are missed, then penalties can be quite excruciating financially.
- Some lenders may ask you to provide collateral.
Business Term Loans
A traditional loan of this type usually implies lenders allowing the borrower an amount of money that has to be repaid in a predefined number of years. Generally, a business can borrow an amount from the lender that can be from $1,000-$500,000. This amount can be repaid over the next five years. However, there are short term loans, as well. Usually, when paying back the lender’s amount apart from the principal, there are also additional interest charges involved. To acquire such type of loan, you need to have a good credit score, sound monthly and yearly revenue stream, and a healthy financial overview.
- The borrowed amount can be used for meeting any business requirements or purpose.
- Repayments are quite easily measurable and predictable.
- The sum of money that you borrow can be quite substantial.
- You can be approved for the loan amount within a couple of days.
- There might be an early repayment charge involved.
- If you have poor credit standing, then collateral may be applied.
Like the name itself applies, these types of loans are usually in need of acquiring better and improved equipment for their business but are unable to do so. Hence the lender helps them acquire business equipment, which is generally categorized as a ‘hard asset’ for the company. However, if the loan amount is not paid back, then the lender can assert their ownership of the bought equipment.
- Good for business with less than perfect credit score.
- The collateral for this loan is the equipment itself.
- Funding for this loan takes a couple of days.
- If the equipment depreciates, then you might end up paying a heftier amount in return.
- You might end up with obsolete equipment by the time you pay back the loan.
To understand this type of loan, which is also known as invoice financing, it is imperative to understand that any unpaid invoice for a company is potentially categorized as an account receivable. These unpaid invoices are then exchanged for a sum of money to be borrowed by a lender who offers you the amount that you need. So every single time your client pays up a certain amount of the accounts receivable for your company, it goes to the lender instead to pay back the loaned amount. Terms for this kind of business financing can be up to 16 months.
- You can get approval for this type of loan within a few hours.
- Since your invoice serves as the collateral, lower credit scores, and trading history doesn’t matter.
- Clients who are tardy in their payments can be rectified.
- Early repayment charges for this type of loan can be quite high.
The Final Word
The pros and cons mentioned above regarding the different types of business loans offer insights as to how you should go about assessing the various options available to you. The more informed decision you make, the better it is going to turn for your business in both the short term and in the long run.
Mathew Jade is a business, finance and technology blogger who spends his entire day writing quality blogs. He is a passionate reader and loves to share quality content prevalent on the web with his friends and followers and keeping a keen eye on latest trends and news in those industries. For more updates follow his on Twitter @Mathew Jade.