Financial constraints can make small business operations very difficult.
Research shows that only 48% of small businesses can meet their financial needs. 29% will close shop because they have run out of operating capital. 70% have outstanding debts. 56% have applied for funding for purposes of business expansion.
During financial strains, borrowing from family may not be a solution. Small business loans provide a way out for struggling businesses. Let’s look at how your business can benefit from such loans.
Small Business Loans; What Are They?
A small business loan is financing from lenders for various business needs.
There are tons of options available for business owners. These include equity financing and small business lines of credit.
Others are accounts receivable financing and working capital loans. Some lenders may need collateral or good credit history as qualifying criteria.
US small businesses can get guarantees from the small business administration (SBA). It makes it easier for business owners to get loans by sharing the risk.
The other option is to look to non-traditional lenders. These avail funding from non-traditional lenders. The application process is quick, and within 10 minutes, a lender will give a pre-approval.
Everything happens online, removing the need for a face-to-face consultation. Reputable vendors will provide upfront pricing. That way, there will be no concerns about hidden fees. Such unexpected costs can make the loan more expensive in the long run.
Lenders give flexible repayment terms and can borrow healthy sums of capital. This is why getting a small business loan from a non-banking lender is the best option.
With an understanding of small business loans, let’s look at the benefits to your business.
Why Applying for Small Business Loans Makes Sense
- Quick Access to Working Capital
Working capital small business loans provide funding for daily operational expenses. These include bills, payroll, and debt to suppliers or vendors. The money goes towards short-term operational expenses.
Working capital loans are ideal for small businesses with insufficient cash flows. They provide a means to sustain the business while the owner focuses on building the company.
Many lenders will let you know whether you have qualified for the loan within minutes. In 24 hours, you could have the money in your account. Quick access to funding can be handy in an emergency.
When applying, make sure you have all the documents ready. Find out what the requirements are from the lenders and prepare well. Most of them will not need too much information. They may only ask for basic documents like a business plan.
- Flexibility in Borrowing
As an entrepreneur, you can apply for small business loans for various reasons. It may be a means of achieving your company goals. You may, for instance, be looking at expanding to other areas. Small business loans provide a way to accomplish this.
As we stated, there are tons of loan options available. Traditional lending institutions like banks offer such. Other options include online lenders, grants, financing programs, and much more.
Loan facilities like lines of credit mean you only pay back what you spend. Think about it much like a credit card. This is different from other types of loans. With such, you are still liable for full repayment of the amount you borrowed. It doesn’t matter whether you used the money or not.
Borrowers can negotiate with lenders on reasonable repayment terms and periods. Some short-term lenders will, for example, allow for daily, weekly, or bi-weekly repayments. It makes it easier to make payments without defaulting.
- Low-Interest Rates
State-backed business loans tend to have lower interest rates. These include SBA, small business financing programs, and small business grants.
With grants, the eligibility criteria may be strict. But, if you qualify, you don’t even have to pay back the money.
SBA-backed loans interest rates can be pretty low. SBA 7 loans range from 5.50%, CDC/504 loans start from 3.7%, and so on. It can be a big relief to small business owners who avoid borrowing due to high-interest rates.
- Loans Provide Funding for Equipment and Inventory
The business may need to replace or buy new equipment. Other times, you have to buy extra inventory to meet customer needs. This happens a lot for seasonal businesses. Let’s say you sell winter clothing. During that time, the company could experience a peak, requiring enough inventory.
The one thing that is clear is such expenses need an adequate capital injection. But, it may happen when you do not have cash flow.
Applying for a small business loan will provide the funding you need for such purposes. That way, you do not divert the available cash from other core areas of the business.
- Tax Benefits of Small Business Loans
Small business loan interest rates are tax-deductible. You can write them off as business expenses. Do note, though; there are some criteria you must fulfill to get these benefits.
The IRA, for instance, demands that the money should be from an actual lender. This could be an institution or alternative source. So, that loan from a family or friend will not be tax-deductible.
You must have also spent the money. The interest applicable to whatever is in your bank account is not a deductible.
Any payments towards the principal amount are taxable. This is because it does not fall under business operations. Yet, interest on the amount is a business expense, which is tax-deductible.
Like in the case above, the businesses must show that they are using the money to generate Revenue. The company must also prove that it has a legal mandate to make interest payments.
Final Thoughts
Small business loans have many benefits. It provides a source of funds necessary for a company that may be facing cash-flow problems. Business owners can use the loans to expand the business and buy new equipment or inventory.
The availability of working capital ensures business continuity, even in times of financial constraints. Applying for such loans is easy, and the approval process is quick.
Do take time to research the best option for your business. Pay attention to factors like interest rates, repayment periods, and fees breakdown.
Reputable lenders will be willing to negotiate the terms. You want to be comfortable when making payments to avoid defaulting.