It is not always the right time to consider taking out a business loan. Sometimes, there is just too much else going on to focus on arranging it. Other times, there’s no plan in place for how the proceeds should be best used. Qualifying for a loan isn’t always possible either – it depends on the business, the founder, and other variables too.
When is it the best time to take a loan, and is one type better over another?
The Timing of Business Loans
Just like there should be a plan for any business, this is also true when taking out a business loan.
Only having a rough idea of how the borrowed money will be utilized is a poor plan. The loan will need to be repaid, including the cost of borrowing. So, it’s important to derive value from it.
The timing of the loan is also worth considering. Can expenses be handled from cash flow and a loan be requested a few months later when it will prove more beneficial? Not taking it too early avoids paying interest unnecessarily. Then the costs can be incurred at the most appropriate time.
What Business Loan Type is Suitable?
There is a big difference between conventional and SBA loans.
A conventional loan is typically issued by a bank. It carries a higher interest rate, so it’s more expensive per year to keep the loan outstanding. The loan term is shorter with a 1-5-year duration. This may or may not be long enough to spread the cost adequately to make it affordable.
An SBA loan is associated with a Federal Agency that supports small businesses, like those offered by Kapitus. These loans often have a lower interest rate, but this does vary from loan to loan, so it’s not always the case. The loan duration is commonly from 5 years up to 25 years. Therefore, it’s possible to spread the repayment cost over a longer duration. However, it’s less ideal for smaller, short-term lending needs.
Is It Easy to Qualify?
A conventional business loan from a bank requires excellent credit scores. This may include a FICO SBSS score and possibly a personal credit check too. The loan can require up to four months to arrange and isn’t guaranteed.
With an SBA loan, a FICO SBBS score of around 140 or higher is needed. It may require up to 6 months to get approval too because of the red tape involved. Also, it needs to be demonstrated that personal monies have been invested in the business; essentially, “skin in the game”.
Can You Borrow Enough?
Traditional business loans from a bank usually have a high lending amount. They’re not like an auto loan or a personal loan for a few thousand dollars. As such, it’s possible to not qualify for such a high borrowing amount or just not need that much but not be offered a lesser sum.
With SBA loans, there is more flexibility about how much can be borrowed. However, this is linked to a longer repayment period. So, business owners can end up taking out a small sum and repaying it over many years. This is either a good thing or a bad thing depending on your point of view.
Ultimately, there are different limitations or restrictions on business loans. Qualifying requirements, lending periods, and turnaround times differ considerably. Because of this, business owners must consider their options carefully to make the right decision.