The two main forms of capital are debt and equity. Small business owners are hesitant to use debt to grow their businesses. It is important to note that successful companies have made use of both equity and debt to fund growth and expansions.
The following are advantages of getting a business loan to fund growth:
- Associated with lower costs in the long run – For a small and growing business, the cost of debt is minimal compared to what you would lose from giving up equity.
- Greater Control – Lenders have no interest in influencing or controlling your business, unlike equity investors who assume some level of control over the business.
- Debt is easier to obtain – A business owner can get a business loan within a matter of days. Getting equity investments is a lengthy and involved process that will take months.
- Tax benefits – Interest on loans is tax-deductible depending on the accounting approached used. Overall, the cost of the business loan will be lower than the stated interest rate.
- Helps to build business credit – Business loans will help you build credit history and help towards accessing credit at favorable terms and rates.
Categories of Small Business Loans
- Term Loans: These loans are also referred to as installment loans and is provided as a fixed amount that is repaid in installments over a fixed period. They are the most common type of business loans offered by banks and will require collateral or a personal guarantee. Term loans are best suited for established businesses that can show positive cash flows.
- Line of Credit: With a line of credit, the business has access to funds as per its needs and over a draw period with interest charged on the outstanding balance. Upon payment of the balance, a line of credit will be returned to its original amount.
- Merchant Cash Advance: This is a lump-sum cash advance provided in exchange for a percentage of future credit or debit card sales. The loan is best suited for businesses that have strong credit/debit card sales.
- Invoice Factoring: Invoice factoring entails a business selling its invoices or accounts payable to lenders for a discount. The business will receive an advance rate normally 80 percent of the value of a factored invoice. The lender will then forward the remaining payment after collecting payment from clients and deducting a service fee.
- Equipment Lease: These are extended rental agreements for equipment use where a business will pay periodic lease payments. Terms for an equipment lease are dependent on the type of equipment and useful life of the equipment.