Business Strategy, Credit KnowHow, Financial Management, General Finance

Small Business Loans – Why and Why Not

When it comes to financials that concern your organization’s growth and prosperity, you would never want to take a chance, would you? Additionally, when it comes to your personal life, you’d always want a steady flow of income and a safety net to secure your and your family’s future as well. This brings us to a rather peculiar scenario of growth prospects. Addressing the elephant in the room, we would need to look at the importance of business loans and the ways in which one should be using them best. Business loans, if taken at the right point of time can further an organization’s reach and scope in a broad manner. On the flipside, taking a business loan without having a plan for progress in mind can be more of a liability than an asset. So, what points should you focus on, as a small business owner, before going in for a working capital loan? There are a few key questions that you should ask yourself before you decide on a business loan –

  1. What do you need the finance for?

  2. How soon you need the finance?

  3. How much finance do you need?

  4. How long do you need to repay the loan?

  5. How long have you been in business?

  6. What is the financial condition of your business?

  7. What is the collateral (if any) you have in mind?

The answers to such questions will help you get clarity on the kind of loan that you need. It could be a government-backed loan, a business loan or credit line from a bank, cash advance, or credit line from microfinance lenders (alternative lenders). There are pros and cons associated with every form of lender. In the following few lines, you can read about the brief descriptions of the different types of lenders.

  1. Small Business Administration Loans – These are government-backed loans. The government basically doesn’t offer the finance but lays down a set of rules and regulations for approved partners like banks, NBFCs and microfinance entities to provide the loans. For the lender, it means lower risk and for the borrower, it means comparatively lower interest rates. But for those who need loans on a really short notice or don’t have access to all the paperwork that is needed, this option rarely works out. Plus, there are a lot of extra fees to be paid

  2. Conventional Business Loans from Banks – Banks provide SBA loans and they also provide loans on their own terms and conditions. Here, the government is not guaranteeing that the bank will be receiving its money back. Hence, it all comes down to how the bank sees your business. If your business is perceived as a profitable one, you might get lesser interest rates than advertised and will not require to adhere to very stringent rules as the SBA loans. The approval process can be faster, though it’s often difficult to get approved by banks. The repayment duration is shorter than SBA loans

  3. Business Financing from Alternative Lenders – When it comes to faster turnaround times and lesser rules and regulations, these options are the best. Be it small businessmen who have started their journey or established business owners with high margins, alternative lenders are preferred for almost immediate business financing. The flipside to these lenders is that the interest rates can be comparatively much higher for a first-time borrower

You might be thinking that every type of lender mentioned here has a point which can be helpful for you. That is correct and it is actually up to you to understand when you should be approaching which lender to get a loan that can help in the growth of your business. If you are starting a business and have a great business plan, SBA loans might be better because of their longer tenure of repayment and low interest rates. Bank loans can help out when you don’t have the time to wait for an SBA loan to be approved. For example, when you have a prime piece of property that is on sale and you think it would be ideal for an office space or a warehouse. But when it comes to fulfilling seasonal sales and getting supplier discounts on short notice, alternative lenders might be the only way out. It is also imperative to understand that different lenders also have different information requirements. While an SBA loan will require every possible documented proof of your personal and business details, bank loans will need detailed information about your and your business’ financial records and alternative loans can vary in their requirement of information. In order to maximize your chances of getting a loan approved, you need to plan well in advance. You need to observe a good credit behavior, paying your dues and installments on time, ensuring your business shows consistent profit and that your presence in the business is there for a long time, preferably years together. Collateral requirement and checking of IT returns could also be done. Let’s have a point-wise view of all three types of lenders and their criteria for loans –

 

SBA Loans

Bank Loans

Alternative Loans

Approval Time

Very High

Medium to High

Low to Medium

Interest Rates

Very Low

Medium to Low

High to Low

Loan Tenure

High

Medium to High

Low to Medium

Documentation Required

Very detailed

Lesser than SBA Loans

Least (in most cases)

Processing Time

Very high

Medium to high

Low (in most cases)

Fees and Charges

High

Medium

Medium to Low

Collateral Required

Yes (in most cases)

Yes (in most cases)

Yes (depending upon the case)


As a signing off, keep in mind that a business loan, just like any other loan, is a responsibility and a liability. Availing one at the proper time and repaying it on time will ensure that your next loans are available at much lower rates and in shorter time.

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Rahul Sanklecha

Being an MBA in Finance with a degree in FRM, Rahul is a subject matter expert when it comes to personal finance owing to his nearly decade-long experience with stocks, mutual funds, bonds and debentures. An avid writer and football fan on the flipside, he currently serves as the VP - Credit & Operations at Lendingkart.