Many entrepreneurs may feel uneasy about getting a small business loan no matter how much they may want to keep growing 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.
There Are Only Two Certainties in Life: Death and Taxes
Small businesses that take out bank loans can enjoy some relief come tax time, as the percentage of profits used to repay the loan are exempt from taxes. While this may not sound like very much, if only thinking of it in terms of percentages, 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 meaning 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, always knowing the exact amount they will pay from one month to the next, rather than having to be concerned about any ebbs and flows in the market.
No Strings Attached
Borrowing money from a bank, while coming with the burden of repaying with interest, comes with the benefit of being able to spend the money however you need, which 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, whereas many other sources would then require additional documentation. Banks and credit unions are also not entitled to a percentage of the profits, often times making for much easier, straightforward bookkeeping and repayment.
If you are able to obtain an SBA loan through the government, you will be in luck, as often SBA loans offer lower interest rates and a longer period of time in which to repay the loan. These loans may also be used for debt refinancing.
If possible borrowing money from a friend or family member could be a good option, as you will often pay a lower interest rate (perhaps no interest at all, depending upon the generosity of your benefactor) than you would through a commercial bank and may 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, which is something to consider in lenders, as you certainly don’t wish to strain any of your relationships.
Simply put, you remain in control of your business.
Give Me Some Credit
While you may 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, is the establishment of that aforementioned credit. In turn, you will find an easier time in obtaining corporate credit cards if needed for in-the-moment purchases, or additional future loans for things such as capital improvements or expansion.
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 would. Something to consider before reaching for your wallet….perhaps you will want to reach for a loan application, instead. You will spend far less in the long run, in repayment.
Believe it or not, another benefit of a small business loan is that it will actually force you to develop a strong business plan, mission statement, 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 answers to how you would address any number of circumstances that may arise, allowing you to give a great deal of thought to your long-term strategies and problem-solving. While at first, this may seem tedious or overwhelming, in the long-run, it will not only increase your odds of obtaining the loan, it will provide you with an even stronger foundation for your small business as you move forward, as 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, knowing that your loan repayment has already been accounted for in your business planning.
As cliche as it sounds, sometimes there is something to the old adage of, “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 before it will be necessary to invest in a more thorough marketing plan and strategy.
You will not be able to successfully expand if you continue to work out of a cramped space that is making it increasingly difficult to work effectively. All of these are but a few examples of ways in which you and your small business can benefit from a small business loan. These 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 achieve your goals of growth.
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 (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 in turn, capacity), you may be leveraging yourself to pay off the loan ahead of schedule. Not only will this help your wallet, it will bode well for your creditworthiness, should you need to take out another loan at some point down the road.