Small business loans are a type of financing that is designed for small businesses, typically with fewer than 500 employees and less than $7.5 million in annual revenue. Small business loans can be obtained from various sources, such as the U.S. Small Business Administration (SBA), banks, online lenders, or community lending institutions. Small business loans can have different interest rates, fees, terms, and features, depending on the lender, your credit score, and your business needs.
Benefits of small business loans
Small business loans have several benefits, such as:
- Access to capital: Small business loans can help you access the capital you need to start or grow your small business, and take advantage of new opportunities, such as launching new products, entering new markets, or hiring new employees.
- Competitive terms: Small business loans can have competitive terms, especially SBA loans, which have low interest rates, long repayment periods, and low or no fees. SBA loans also have flexible eligibility requirements, and can be used for most business purposes.
- Counseling and education: Some small business loans come with continued support to help you start and run your small business. For example, SBA loans offer free or low-cost counseling and education through SBA resource partners, such as SCORE, Small Business Development Centers, and Women’s Business Centers.
Drawbacks of small business loans
Small business loans also have some drawbacks, such as:
- High debt burden: Small business loans can result in a high debt burden, as you have to repay the loan with interest, regardless of your business performance. This can affect your cash flow, credit score, and ability to get other loans or credit cards.
- Risk of losing your assets: Small business loans are usually secured by your business assets, such as equipment, inventory, or accounts receivable. This means that if you fail to repay the loan, the lender can seize your assets and sell them to recover the debt. This can damage your business operations, reputation, and value.
- Impact on your ownership: Small business loans can impact your ownership, as some lenders may require you to provide a personal guarantee, a lien on your personal assets, or a share of your business equity as collateral. This can limit your control and decision-making power over your small business, and expose you to personal liability.
How to compare and choose the best small business loan for you?
To compare and choose the best small business loan for you, you should consider the following factors:
- Interest rate and APR: The interest rate and APR are the most important factors, as they determine how much you pay for the loan. You should look for the lowest APR possible, and compare the APRs of different lenders and loan options, such as term loans, lines of credit, or SBA loans.
- Loan amount and term: The loan amount and term are the amount of money you borrow and the length of time you have to repay it. You should only borrow what you need and what you can afford to repay, and choose a term that fits your budget and goals. A shorter term means a higher monthly payment, but less interest. A longer term means a lower monthly payment, but more interest.
- Fees and charges: You should also check if the lender charges any fees or penalties for the loan, such as origination fees, prepayment penalties, or late fees. These can increase the cost of the loan and reduce the amount of money you save. You should look for a lender that offers low or no fees, or that waives or reduces the fees for certain borrowers or situations.
- Customer service and reputation: You should also consider the lender’s customer service and reputation, as well as the ease and convenience of the application and funding process. You should look for a lender that has positive reviews, responsive service, and transparent policies. You should also check the lender’s accreditation, ratings, and complaints with the Better Business Bureau or other consumer protection agencies.
Where to get a small business loan?
There are many sources of small business loans, such as the U.S. Small Business Administration (SBA), banks, online lenders, or community lending institutions. You can use online tools, such as Lender Match or NerdWallet, to compare different sources and options. You can also check your eligibility and apply for SBA loans using the SBA website.
Before you apply for a small business loan, you should check your credit score and report, and improve them if possible. You should also prepare a business plan, a financial statement, and a cash flow projection, and gather any documents that support your loan application, such as tax returns, bank statements, or invoices. A small business loan can be a helpful tool to fund your small business and achieve your goals, but only if you use it wisely and responsibly.