The Pros and Cons of Emergency Loans
In most cases, handling emergencies will cost you a great deal of money. If you don’t have the cash on hand to pay for them, an emergency business loan can help. Let’s take a closer look at what emergency business loans are as well as their pros and cons.
What is an Emergency Business Loan?
An emergency business loan is exactly what it sounds like; it’s a loan program intended to cover the costs of business emergencies. You may use one to fund a critical piece of equipment that suddenly stops working.
An emergency business loan may also help you continue operations when a global pandemic or earthquake strikes. It may be just what you need to get through a difficult time. You can get an emergency loan through a bank, credit union, online lender, or even a government backed organization like the Small Business Administration (SBA).
Top Emergency Business Loan Options
There are a number of emergency small business loans available. The state of your business as well as the circumstances of your emergency and future goals can help you choose the ideal option for your situation. A few of the most common types of emergency business loans include:
- Term Loans: With a term loan, you receive a lump sum of cash upfront. Then, you repay it on a monthly basis over an agreed upon term. If you have to finance a one-time emergency expense, a term loan may make sense.
- Business Line of Credit: If you’re unsure of exactly how much money you need to cover your emergency, a business line of credit is worth considering. With this funding option, you can borrow as much or as little as you’d like up to a set credit limit. You’ll repay the amount you withdraw plus interest.
- Invoice Factoring: Invoice factoring can be a good fit if your customers owe you money. You can sell your unpaid invoices to a factoring company for a fee. Just keep in mind that this type of emergency loan may be costly and require your customers to deal with the company directly.
- Merchant Cash Advance: A merchant cash advance is when you receive a lump sum of money in exchange for a percentage of your future credit card sales or revenues. It typically has shorter terms than other working capital options.
- SBA Disaster Loan: The SBA offers disaster loans with low interest rates. You can take one to to repair or replace items in a disaster. These items may be real estate, machinery, property, and other physical assets.
The Pros of Emergency Loans
The most noteworthy benefits of receiving a loan after an emergency include:
- Fast Application: Depending on the lender you choose, you can apply for an emergency loan online from the comfort of your own home or office. Compared to other types of loans, an emergency business loan application requires far less documentation.
- Flexible: While emergency loans are designed for emergencies, they can be used to cover a variety of costs. An emergency loan may pay for inventory, equipment, a leaky roof, a broken air conditioner, last minute staffing, and virtually any other unexpected expense.
- Various Repayment Terms: Emergency loans come with a variety of terms ranging from several months to several years or longer. Keep in mind that while longer repayment terms allow for lower payments, you’ll pay more interest in the long run. Prior to taking out a loan, ask the lender how their weekly or monthly payment terms work.
- No Need for Collateral: There are many unsecured emergency loans, meaning you don’t need to secure them by collateral like your equipment or commercial property. This is great news as the lender may seize your collateral if you default on a secured emergency business loan.
- Fast Funding: You won’t have to wait weeks or months to receive the funds upon approval. Most lenders will distribute them via direct deposit within 24 hours or a few business days. Some business lenders even offer instant or same day funding.
The Cons of Emergency Loans
Just like all financial products, there are some drawbacks to emergency loans such as:
- Strict Requirements: Since most emergency loans are unsecured, you may have to meet rigorous criteria to get approved. This can be problematic if you haven’t been in business for too long or have a low credit score.
- High Interest Rates: While interest rates vary from lender to lender, many emergency loans feature high interest rates, sometimes in the triple digits. A high interest rate can cost you thousands of extra dollars over the life of your loan.
- Smaller Loan Amounts: Emergency loans are short-term loans for emergency expenses. Therefore, they tend to come with smaller amounts than longer-term loans. If your emergency is very expensive, you may find it difficult to get approved for all the money you need.
- Predatory Lenders: Even though there are many reputable lenders that offer emergency business loans, some are predatory. They may charge exorbitant fees or interest rates and make your emergency situation even worse. Fortunately, you can uncover predatory lenders fairly quickly if you check out BBB profiles and read customer reviews.
Conclusion: Move Forward From a Business Emergency with an Emergency Loan
Emergencies are an inevitable part of running a small business. When things don’t go as planned, an emergency loan can help you recover quickly. Before you commit to one, however, be sure that the lender you go with is reputable and you can comfortably repay it.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.