It doesn’t take much for a small business owner to find themselves behind the eight ball. A few clients delaying payment, a protracted business slowdown or financial calamity like a fire or earthquake can leave a small business with an anemic cash flow and a desperate need for capital. However, entrepreneurs seeking a loan to keep their companies afloat should be wary of excessive interest rates and unfavorable terms that may leave their businesses trapped in a cycle of perpetual debt. Here are a few things you should consider before getting a small business loan.
What is the interest rate?
Online lenders like Kabbage and On Deck have had major success disrupting the finance industry by giving loans to small business owners who were turned down by big banks. Additionally, these alternative lenders have attracted a lot of attention by approving and dispersing funds in a fraction of the time that it would take a bank to review a loan application. However, getting a loan at the speed of the internet does come with a price, namely interest rates that can be as high as 35 to 75 percent. With such steep rates, many business owners will find themselves repeatedly taking out loans just to keep the doors open. As this Nerd Wallet piece points out, it’s a good idea to find a lender that is more invested in your long-term success than making as much money off the loan as possible.
What do you need the money for?
Small businesses need injections of capital for a variety of reasons. You may have experienced a slowdown that has reduced your cash flow to a trickle, or you may want to perform a much-needed refresh to make your business more aesthetically appealing, or you may want to purchase new hardware to expand your company’s market share. If the capital you need isn’t going toward a critical issue, consider applying for the U.S. Small Business Administration’s Microloan program. There are more strings attached than if you went with an alternative lender, such as having to undergo a financial management training program, but as this Business News Daily piece explains, the SBA’s lending terms are much more favorable than any commercial institution.
What are the loan terms?
With some small business lenders, you will be asked to put up collateral in order to secure funding. A number of loans issued by the Small Business Administration require that borrowers put up some form of collateral, typically in the form of business or personal assets. On Deck requires that all of its borrowers accept a general lien on their businesses and make an unsecured guarantee of repayment as part of their loan process. Seeing as the inability to repay certain small business loans might lead to the loss of significant personal assets, you should be reasonably sure that your business’s cash flow issues are temporary before signing on the dotted line. Recovering from the collapse of a company is difficult, but recovering from the liquidation of the majority of your personal assets is significantly more challenging.
This article was written by Mario McKellop for Small Business Pulse