Small businesses have had a very difficult time staying afloat in the past few years, and honestly, any successful owners deserve a pat on the back for persevering through one of the most difficult times we’ve witnessed in our lifetimes. Unfortunately, though, it has meant that a lot of folks are facing financial hardships now that they may not have before. Thankfully, we have options available to us.
One of the biggest ones to be aware of is the small business loan. They’ve grown in popularity since the start of 2020, and it’s not hard to see why. To say they’re a valuable resource is an understatement, really, considering how these credit agreements were able to help keep so many small businesses afloat throughout the height of the pandemic.
Governments and financial institutions across the world rallied to support these types of businesses and owners, and for good reason. For a lot of economies, they form the backbone of success and prosperity. Has anything changed, though?
Thankfully, the answer to that is “no.” So, if you’re looking for a loan to help jumpstart your business or to inject some much-needed capital, this could still be an option for you. Read further to learn about how it works.
What are Small Business Loans?
Let’s start off with the basics: what is a small business loan? Put simply, they’re a type of credit agreement that has some pretty strict requirements on the part of both the lender and the borrower. However, because there are a few different types of these, that can change depending on where you live and the lender that you’re planning to work with.
For example, if you’re getting a bedriftslån in Norway, it’ll probably end up working quite similarly to a consumer loan. Typically, they’ll just be called “business loans” instead, which denominates the different uses that they’ve got. Realistically, though, the biggest difference will be how the money is spent once you get approved.
Obviously, these are intended for owners to use to inject some capital into their organization. What might that look like, though? There are a lot of potentials to consider here, and to some extent, it’ll depend on what industry your business is in.
Improving Everyday Operations
This is a big one, since it’s all about using the funds from a loan to improve the daily functions of your business. Whether this is to ensure that employees get their paychecks, to pay the rent, or even to handle marketing fees, often it can be a lifesaver in a pinch. When you get asked “what is the money for,” or something along those lines, typically this is safe answer.
Purchasing Extra Machinery or Equipment
Do you make your own goods in-house or at a closely related factory? Are you the one in charge of buying or maintaining that equipment? Well, that’s something else that these credit agreements can help cover the costs of. Again, it’ll probably depend on what the goal of your business is and what sorts of goods that you need to create. Of course, things like cash registers or other simple needs can be purchased with them as well, so that’s good to keep in mind.
Opening a business is expensive. However, if you’ve got a proof of concept, some inventory prepared, and a game plan as you move forward, you may be able to get a loan to help you with those startup costs. Inherently, this involves more risk for lenders. So, just expect that you may have higher interest rates if this is your goal, or a higher fee for opening the credit agreement in the first place.
What all is included under the umbrella of the “start-up” cost, though? Thankfully, there’s plenty that falls into the category, and you can really argue almost anything. Some go-to selections are hiring employees, purchasing machinery or technology that’s necessary to get yourself started, and even marketing or advertising costs.
Every business has a set amount of inventory at any given time. However, if something amazing happens and you go viral with an advertisement or you get an endorsement from a popular influencer (or something similar), you may end up needing to order a large bulk of inventory all at once. When this happens, it can be hard to get that money up-front.
Of course, that’s where these sorts of loans can really come in handy. They can help you to make the down payment to get an advance on stock for your store, allowing you to fulfill more orders sooner. Thus, you’ll end up making more profit in the long-term, so this type of loan pays for itself quite well.
Are they worth it?
So far, it’s fair if you think that perhaps all of this sounds a little bit too good to be true. In some circumstances, that is the case. If a lender is asking for collateral for a business loan, that may be a red flag. You’ll want to look for one that is not asking for that collateral.
What is collateral, though? In the context of finances and credit agreements, it’s something that the borrower puts up as recompense for the lender in the case that they end up defaulting. So, the property that you’ve purchased for your business could be one of them, or even a share of the overall company value.
Obviously, taking out a loan with something valuable up as collateral can be pretty nerve-wracking. Generally, it’s recommended not to get one like that, especially for business expenses. The market is unpredictable, and we never know when something could go wrong. Not having this additional thing hanging over our heads can be a real relief.
Just bear that in mind as you search for potential lenders to work with. You may want to get a consultation with a few different banks or financial institutions before you make your choice on where to apply.