Many entrepreneurs may feel uneasy about getting a small business loan no matter how much they want to grow their business. After all, no one wants to begin their new venture in debt, right? But, much as there are benefits to paying for renters insurance or health coverage, there can actually be some perks to taking out a small business loan.
6 Benefits of a Getting a Small Business Loan
1. Exemptions in Taxes
Small businesses that take out bank loans can enjoy some relief when tax time comes. The percentage of profits used to repay the loan are exempt from taxes. This may not sound like very much if you think of it in terms of percentages. But consider this: if 5% of your profits actually equals $5,000, that is money that adds up. Additionally, if you have a fixed-rate loan, the interest rate does not change. This means that the repayment amount remains the same for the lifetime of the loan. This allows for ease in planning and budgeting for a small business owner: you will always know the exact amount you will pay from one month to the next, rather than worrying about any ebbs and flows in the market.
2. Freedom to use the money
Borrowing money from a bank comes with the burden of repaying with interest, but it also comes with the benefit of being able to spend the money however you need. This is not the case with many other sources of borrowing such as venture capital or grants. Even if your needs change from the time of the initial loan application, that is okay and no new information needs to be submitted. Other sources would require additional documentation. Also, banks and credit unions are not entitled to a percentage of the profits. This makes your bookkeeping and repayment much easier and straightforward
If you are able to obtain an SBA loan through the government, you will be in luck: SBA loans offer lower interest rates and a longer period of time to repay the loan. These loans may also be used for debt refinancing.
Borrowing money from a friend or family member could be a good option if you have that possibility. You will pay a lower interest rate (or no interest at all, depending upon the generosity of your benefactor) than with a commercial bank. You can also have more flexibility regarding payment timelines and amounts. With that said, a friend or family member may end up taking a more vested interest in the day-to-day activities of your small business. This is something you have to consider, as you certainly don’t wish to strain any of your relationships.
Simply put, with a small business loan, you remain in control of your business.
3. Credit Establishment
Even if you have your personal credit cards, if you are just starting out as a small business owner, your business may not have any lines of credit or creditworthiness. This is yet another perk of a small business loan: it allows you to establish and build that credit. As a result, you will find it easier to obtain corporate credit cards if needed for in-the-moment purchases, or additional future loans for things such as improvements or expansion.
Learn more about how to build credit for your small business
4. Reasonable Interests
Many of us, when younger, fell into the vicious cycle of credit card debt. Do you really want to fall into that trap again, but this time with your business? Probably not! While it may be necessary, at times, to utilize credit cards for purposes of financing your small business, credit cards generally charge a much higher interest rate (making it harder to pay off) than a loan. This is something to consider before reaching for your wallet… perhaps you will want to reach for a loan application, instead. You will spend far less on repayment in the long run.
If the possibility of a high-interest rate worries you, use our business loan calculator to easily calculate the monthly payments of a potential small business loan.
Believe it or not, another benefit of a small business loan is that it will actually force you to put your finances in order. You will have to develop a strong business plan, a mission statement and a vision statement, and have everything organized, as these are all documents that a lender will want to see and review. Additionally, you will have to consider to answer how you would address any number of circumstances that may arise. This will allow you to think thoroughly about your long-term and problem-solving strategies. At first, this may seem tedious or overwhelming, but in the long-run, it will increase your odds of obtaining the loan. Why? Because it will provide you with a stronger foundation for your small business as you move forward. You will have already given thought as to how to handle various situations and will feel better prepared, more empowered. One of the components of your business plan that will be considered, of course, is how and when you plan on repaying the loan. While this may create a certain amount of anxiety early on, think about how much of a relief it will be down the road: you will know that your loan repayment has already been accounted for in your business planning.
As cliche as it sounds, “you have to spend money to make money”. You cannot expect to generate profits if you are unable to hire the appropriate staff to meet the demands of your customers. You can only rely on word of mouth and social media to spread the news of your small business if you don’t have the money to invest in a solid marketing plan. You will not be able to expand your business if you continue to work in a cramped space that makes it increasingly difficult to work effectively. In other words, the ability to grow your business is the most important benefit of getting a small business loan.
All of these are but a few examples of ways in which you and your small business can benefit from a small business loan. They can be costly endeavors and it may be a more financially sound choice to utilize a small business loan, rather than deplete savings in order to grow.
The simple fact is that while no one really relishes the idea of accruing debt by taking out a small business loan, in many cases the return on investment (ROI) can outweigh the interest being paid. In fact, in many cases, you may be able to pay off the loan ahead of schedule. This could be the case, for example, if another business is closing and you have the opportunity to purchase their inventory for a great price, thus increasing your own inventory and capacity. Not only will this help your wallet, but it will also build your creditworthiness if you need to take out another loan at some point down the road.
We have seen here six important benefits of getting a small business loan. If you are still unsure, read this article: with the information provided, you’ll be able to know if a business loan is the best fit for you. And if you are ready to take the next step to grow your business, check our loan products or get a quote for your loan. We’ll be glad to help you and see your business grow!