If you’re a small business owner, and you need working capital or extra cash to open up a new location, expand your product line, or make it through seasonal drops in customer sales, small business financing may be a good choice for you.
However, it’s not always a good idea to go to a lender to get small business financing. Like most decisions you can make about your business, choosing to get small business financing has both pros and cons.
So, how can you tell whether or not it’s right for you? In this guide, we’ll break down both the pros and cons of small business financing, to help you make the right decision for your particular situation.
The Benefits Of Small Business Financing
Small business financing with a traditional bank can have some powerful advantages. Here’s what you need to know.
- Helps build a lender relationship – If you choose to partner with a bank, you may be able to build a better relationship with that lender. If you pay your loan off without missing payments and are a reliable customer, this may help you get better financing rates in the future.
- Helps build credit in your business – Your business credit score is determined much like your personal credit score, so repaying a loan will help you build your credit score, which will help you get more favorable credit terms in the future.
- Fixed interest rates and predictable monthly payments – Most small business financing loans use fixed interest rates, so your monthly payments will always be the same. This makes accounting very simple.
- Cash is available for any required investment – You can use your infusion of capital to purchase new inventory, hire new workers, acquire another business, purchase real estate, buy new equipment, or for just about any other investment in your company.
The Disadvantages Of Small Business Financing
Small business financing has plenty of advantages, but it also has a few drawbacks you should know about – before seeking a lender! Here are the details.
- Takes a long time to apply and process – Banks tend to take their time when issuing small business financing loans. They may require you to give them information about your cash flow, assets and income on-hand, and other details about your business. In addition, they may also perform credit checks, background checks, and other due diligence to ensure that you’re able to repay.
While this is fine in theory, in practice it means that you may have to wait several weeks – or even several months – to hear if you’re even qualified for a loan. Small business financing from a traditional lender is not appropriate for business emergencies.
- Requires a good credit score – If you have bad business credit or even bad personal credit in some cases, you may simply not be eligible for small business financing.
- May require collateral – You could be required to put up equity in your company, or even your personal assets in order to secure a small business loan from a bank. If you default or fail to pay, the bank can then seize these assets, so there is some personal risk involved when getting small business financing.
- Could cause cash flow issues – It may be nice to have the lump sum of your loan available, but a high monthly payment could easily cause cash flow issues, especially in a seasonal business such as landscaping or retail. You will need to make sure that your financials and business model are rock-solid – otherwise, you risk defaulting and losing your collateral.
Is Small Business Financing Right For You? Consider These Pros And Cons!
If you are already running a successful business, have a great credit score, and don’t need emergency business funding, small business financing from a bank may be a good choice for you.
Alternatively, if you don’t want to risk personal or corporate assets, have a sub-par credit score, or are worried about making monthly loan repayments, it may not be right for you.
It all depends on your particular situation and your tolerance for risk. So, take another look at these pros and cons now, and see whether or not small business financing makes sense for you!