Should I get a Small Business Loan?

Often, small businesses try to take out business loans at inappropriate times. Instead they might be better off taking a different commercial finance product, and also when they are unlikely to be granted a loan by the lender.

Before looking for a business loan, ask yourself a few questions:

Firstly, do you need money purely to help with your cash flow? If so, then you should look at factoring, where you get cash advances on your invoices, which allow you to unlock money your company is processing but is tied up.
Secondly - do you need to buy equipment, machinery or another kind of fixed asset? If so, there are other types of asset finance, like leasing. You can also try hire purchase.
Thirdly - can you offer any collateral such as property as security for the loan? If so, then a mortgage could be the cheapest way to borrow, especially in these days of low interest rates.

Next, you can look at the advantages and disadvantages of small business loans.

The first advantage of taking out a loan is that it enables you to retain ownership of the company, because you aren't raising funds by selling part of your company to investors. Thus, you only have to pay an interest return to your lender, not a share of profits or the company.

You can use loan proceeds for any purpose, whether it be paying off debt or buying machinery, whilst preserving cash and working capital. This loan, with minimal up front payments and the ability to design a repayment schedule, lets you match payments to projected cash flows, minimizing working capital drain. More importantly, as loan schedules are preset you are able to predict your cash management better. Plus, loan interest is tax deductible and paid with pre-tax money.

The first disadvantage of business loans is that you may need to provide guarantees that could affect your personal credit rating or your position with your bank.

Then there is the issue of collateral. In order to secure the loan you may need to pledge some kind of asset to the lender. Should you default on the loan then the lender has the right to foreclose on the asset so that they can sell it in order to repay the money owed to them. This could be your personal property, so make sure you limit the amount you have to commit in order to secure the loan. Ensure also that the loan contract confirms that the lender has to release its security interest and has to make government filings necessary to acknowledge the release.

A final disadvantage is that the lender can decide what constitutes a default, and it could be any kind of obligation, not just missed payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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