Pros and Cons of Different Business Loans

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Small businesses are the backbone of this country. They employ over half the workers and drive the economy. In the course of these small businesses conducting business, they often need a loan. There are several loan types available that can meet various needs.

But how do you know what type of loan is best for your business? There are pros and cons to all of them. It’s essential to apply for a loan that meets your goals and that you can realistically pay back.

Term Loans Good for Investments and Ongoing Needs

A term loan is an option if you want to invest in a specific area or need working capital. It’s not a good choice for emergencies or occasional situations.

A term loan is when you borrow a set amount of money and then pay it back with interest. It has a specific repayment schedule.

There are long-term and short-term loans. You might want to consider a long-term loan if you have a large purchase and good credit. For small to medium purchases, a short-term loan might suffice.

Some reasons you might want a term loan include acquiring a new business, expansion, or buying real estate.

There are several pros to a term loan, including:

• low interest rates (long-term)
• manageable monthly repayment schedule (long-term)
• fast funding (short-term)
• relaxed eligibility requirements (short-term)

The cons of term loans include:

• requires strong credit (long-term)
• loan approvals take a while (long-term)
• high interest rates (short-term)
• often comes with daily or weekly repayments (short-term)

If you have good credit and can wait, a bank may be an option to apply for a loan. If you’re in a hurry, a short-term lender might be your choice.

SBA Loans Good Provides Low Interest Rates

The Small Business Administration (SBA) and lenders partner to offer guarantee loans from $500 to $5.5 million for various business purposes. Interest rates are competitive and are capped by the SBA.

There are three types of SBA loans:

• 7(a) loans—most common offer up to $5 million in working capital
• 504 loans—offered up to $5 million used to purchase major fixed assets like equipment or real estate. An asset is used as collateral to secure loan.
• Microloans—offered up to $50,000 and repayment terms are six years. Used to launch or grow. Can’t be used to repay debts or buy real estate.

There are specific qualifications for SBA loans; your business will have to meet size standards. This includes gross annual income or number of employees.

The pros to an SBA loan include:

• low interest rates that are capped
• long repayment terms of 10–25 years
• multiple loan options
• government guarantee

The cons to an SBA loan include:

• prepayment penalties apply
• funding can take 60–90 days
• strict borrower qualifications
• can require a down payment

You'll need to apply directly to an SBA lender. Although the SBA doesn’t have a minimum credit score, lenders usually require a 620 score or better.

Business Line of Credit for Ongoing Needs

With a business line of credit, you can access money as expenses arise. A line of credit lets you minimize your interest expenses when a lump-sum loan isn’t’ what you need. You only pay interest on the funds you’ve withdrawn.

There is a draw period during which you can withdraw money. As you withdraw, interest begins to accumulate. Once the draw period closes, you have to pay the principal and interest payments

Pros of a business line of credit include:

• make withdrawals as needed
• only pay interest on outstanding balance
• quick access to funds

Cons of a business line of credit:

• low borrowing limits
• high interest rates
• origination fees
• can require collateral or a personal guarantee

A business line of credit is great for keeping cash on hand during cash flow gaps or emergencies. But talk to several lenders because fees and interest can vary.

Merchant Cash Advance Helps Cash Flow

Business owners unable to qualify for other business loans may use merchant cash advance loans.

With a merchant cash advance, the lender offers cash in exchange for a portion of future credit card sales. They then take a portion of every credit card or debit sale until the advance is paid off. You, of course, pay interest on the advance.

Merchant cash-advance loans are not regulated by law, so they can be expensive. Depending on your lender’s terms, you may have to make daily payments.

Pros to a merchant cash advance are:

• quick access to cash
• no collateral needed
• bad credit usually accepted

Cons to a merchant cash advance include:

• lowers profit by paying a percentage of sales
• daily repayment can impact cash flow
• lender takes credit and debit card payments

Because these quasi-loans aren’t regulated by law, the sky’s the limit when it comes to rates. If you’re interested in this option, check with several lenders to find one that’s right for you.

Various Business Loans for Various Needs

These loans meet different business needs. Before applying for a loan, be clear about what you truly need the funds for and on what timetable. Talk to an accountant to determine what type of loan might work well for your business.

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