Business is as demanding as it gets — getting it off the ground, running, and growing it. Whether you’re beginning a brand new company or want to expand your existing one, capital can mean a difference in gaining traction. A business loan is one of the most popular ways that entrepreneurs secure funding for their business. However, before you commit to whether or not a business loan is right for you, you should understand the pros and cons, different types of loans available and when to consider getting a loan.

What Is a Business Loan?

A business loan is a financial product from banks, credit unions and online lenders that enables business owners to withdraw money to pay for a range of needs associated with running a business. These types of loans typically necessitate that the borrower pay back the loan plus interest within a defined period of time. Business loans can be used for everything from buying inventory and paying operational costs to expanding your operations or purchasing new equipment or technology.

Types of Business Loans

  1. Term Loans: The most traditional kind of business loan, you borrow a lump sum and repay it over time in installments. Term loans usually have either fixed or variable interest rates.
  2. SBA Loans: Loans that are backed in part by the U.S. Small Business Administration (SBA), these loans help reduce risk for lenders. They often offer lower interest rates and longer repayment terms, but the application process can take time.
  3. Lines of Credit: A business line of credit is similar to a credit card. You are provided with access to a set amount of funds that you can draw upon, and pay back, as necessary. It offers flexibility, since you pay interest only on what you borrow.
  4. Invoice Discounting: This is when a company essentially borrows money against the invoices it has issued. Lenders usually provide a percentage of the value of the invoices and handle direct payment collections from their clients.

Pros of a Business Loan

  1. Access to Capital: A business loan is well recognized and offers you access to the capital you need to grow or continue your business. Whether they are for purchasing inventory, hiring more staff, or launching a marketing campaign, loans will help you achieve your goals.
  2. Versatility: Again, business loans can be used for many things. This versatility allows you to customize the loan to suit your specific financial goals.
  3. Build Business Credit: Successfully repaying your loan in time can ensure building your business credit. This may improve your chances at future borrowing as well, giving you better terms on future loans.
  4. Retain Ownership: Unlike with equity financing, where you need to relinquish an ownership stake in exchange for an investment, a loan enables you to retain full ownership over your company. You’ll still have to repay the loan, but you won’t lose any control over.

Cons of a Business Loan

  1. Debt Obligation: A commercial loan is a debt that needs to be paid back, which often includes interest. If your business has not been able to come up with enough of whatever you need to draw on the loan and pay it back, you may have financial hardship, and ultimately you may will default.
  2. Interest & Fees: Be aware that some loans come with better interest rates and the longer the term, the more interest you’ll pay. And some lenders can charge fees, like origination fees or prepayment penalties.
  3. Eligibility Criteria: It can be tough for a new businesses or companies with bad credit histories to avail a business loan. Lenders usually have strict requirements, and applying can take a long time and be complicated.
  4. Potential Risk to Personal Assets: If your business operates as a sole proprietorship or partnership, then lenders may require a personal guarantee on the loan from you. This means that if your business cannot pay back the loan, your personal assets (such as your house or your car) could be in jeopardy.

Is a Business Loan Right for You?

  1. Figure Out What You Need: Why do you need to loan? If you’re looking for cash to grow your operations or invest in a large piece of equipment, a business loan may be the way to go. But if all you need is a bit for near-term expenses, business line of credit or a credit card might be a better match.
  2. Evaluate Your Financial Situation: Does your business have the capacity to carry that extra debt? If your business is already cash positive and cash flow in order, a loan could be the right option to support your growth. If you’re having a hard time making ends meet, though, it may be best to work on your money problems rather than taking out another loan.

Conclusion

Business loans can be a great way to grow your business, but they do come with risks. Before assuming debt, be sure to consider your needs, financial situation and the loan terms closely. When used wisely, a loan can give you the capital you need to elevate your business. However, it is of utmost importance that you can afford to pay back debt on time so that you do not end up with a financial disaster. In the end, a business loan can be the perfect tool for the right business at the right time.