Pros and Cons of Commercial Business Loans
In fact, 26 percent of business owners who have tried and failed to obtain funding gave up on hiring or expanding because they didn’t have the cash to do it, according to the Small Business American Dream Gap Report. However, with a commercial business loan, small business owners can receive the cash they need to open another location, hire new employees, or purchase new equipment.
Still, a commercial business loan is not for everyone. In this post, we’ll cover the pros and cons of these loans to help you make a well-informed decision.
Provides a Cash Flow Boost
According to the National Federation of Independent Business (NFIB), the top cash flow struggle for small business owners is irregular revenue streams. With a commercial business loan, though, irregular revenue streams don’t have to be an issue. A commercial loan provides the cash you need to invest in new equipment, meet payroll, or afford anything else you don’t have cash on hand for.
If your business operates in a highly seasonal industry or has long payment cycles, a commercial business loan makes it possible to grow your business all year round.
Maintain Ownership of Your Business
In the short-term, selling shares of equity in your company to raise money may seem inexpensive compared to a commercial business loan. However, this funding method carries a different kind of expense. Many small business owners have found themselves on the outside looking in on their own company after raising funding through equity. Commercial business loans, though, give you the access to capital you need to run and grow your business without forcing you to relinquish control of your business.
Access to Large Sums
Small business owners often don’t have the financial capability to raise funding in the debt or equity markets. Nor do they typically have the contacts to raise funding through venture capitalists. This can make starting a business extremely expensive and risky. However, with a commercial business loan, it’s possible to cover all your startup expenses with just one loan.
This also makes it significantly less daunting for business owners without extensive resources to obtain a relatively large amount of funding. Plus, by consolidating all your financing on one loan, you’ll keep things simple.
Extensive Paperwork and Application Process
Since financial institutions extend commercial business loans based on your company’s ability to pay, they’ll require extensive paperwork. According to the Small Business Chronicle, when applying for a commercial business loan, you’ll have to be prepared to provide “two or three years of tax returns, financial statements, accounts receivable and accounts payable documents.” You may also have to give a brief presentation to explain your business goals and objectives. Additionally, it’s a good idea to have a general outline of your business plan.
The lender will use these documents and your presentation to decide if you qualify for their financing. If you qualify, they’ll then use this information to determine your loan amount.
Lack of Flexibility
With a commercial business loan, you’ll need to have a clear picture of what you’ll use the money for and how you plan to pay it back. Unlike financing options such as a merchant cash advance or a business line of credit, the terms of a commercial business loan aren’t flexible. You’ll borrow a set amount of money, make regular monthly payments, and will be expected to repay the loan in an agreed upon term.
If your business has fluctuating revenues, a required monthly payment may not be desirable. Additionally, if you’re not sure exactly how much cash you need, a commercial business loan may be too much, and you’ll end up paying interest on money you didn’t need.
Risk of Default
No loan is risk-free, but that doesn’t mean you shouldn’t carefully weigh the risks of defaulting when it comes to a commercial business loan. Commercial business loans may be secured or unsecured. If your loan is secured, defaulting on your loan could mean losing valuable assets. Even if the loan is unsecured, you run the risk of being taken to court by your lender. At the very least, defaulting on your loan (or even making late payments) will negatively impact your business credit score. In some cases, it could also impact your personal credit score.
If your business is generating regular revenue, but you still need cash to grow, a commercial business loan is something to consider. If you’re able to qualify for this type of loan, you’ll need to determine what kind of commercial business loan is right for your business. Short-term loans may help even out cash flow, but large, longer-term loans could allow you to grow for years to come.
As with any financial decision, carefully weigh your business’s needs, your desire for growth, and tolerance for risk before applying for a commercial business loan.
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.