As the owner or operator of a small business, finding the right type of loan to satisfy the goals of your business will be essential. Taking on business debt, much like personal debt, can be a valuable element of your overall financial strategy.
Often, the best place to start when considering loans is actually your endgame: What are you trying to achieve by taking on debt, and will there be a positive return on investment on anything you might use the debt to finance?
Evaluating the outcome will help you to understand if debt will ultimately benefit your business or hamper you. Here are a few additional details to consider.
Access to capital can help you grow
Many businesses look to leverage debt toward faster growth. If you are thinking about growth, the type of lending will partly depend on how much funding you need to take the next step in your business.
- Less than $5,000. A business credit card could likely fulfill your current needs — and might be easier to open than a line of credit or a term loan.
- More than $5,000. This is the minimum amount to open a term loan or line of credit at M&T Bank. Term loans can also be millions of dollars, depending on what you’re purchasing.
How long do you need it for?
Think about a business loan in the same mindset as a personal loan. If you were buying a boat, for example, you’d probably prefer to use a term loan so that you have it paid off at the end of a set period of time. Unless you have the cash to pay it off, you wouldn’t be likely to go out and put a boat on a credit card or a line of credit.
Term loans and real estate mortgages each have a definite lifespan, meaning that your lending institution will want the loan paid off within a time period (which can be negotiated based on your business needs when you take out the loan).
If you instead want ongoing access to capital, a line of credit might be more useful for you because lines of credit are typically established to be revolving.
A loan can help keep your business in your hands
When you need extra cashflow or working capital, your first thought may be to bring in additional investors or allow your current investors to finance you by providing them larger percentages of your business.
You might also think about turning to family for a loan. Interpersonal issues aside, remember that — typically for loans in excess of $10,000 — the IRS expects your family member to charge you the minimum IRS interest rate to make the loan legitimate.
But when taking out a loan, you can keep your partnerships and investor status exactly as it is, thus preserving your equity stake for the long-term.
Loans come with additional benefits
While the main benefit of a loan, of course, is that you will have the funds you need to pay for your needs, there are a few added benefits that might affect your operations today and in the future.
- Loans may have tax benefits. The interest you pay on a loan will often be a write-off on your books come tax season. Consider consulting with your tax specialist about any loans.
- When payments are made on time, a loan can help you build your business’s creditworthiness. Opening even a small term loan or business credit card will allow you to make ongoing payments and establish your business credit score. (Ask to make sure your lender reports to a business credit bureau.) As your business continues to grow, that credit score will become essential to your ability to access more funds.
Consider if an SBA-backed loan might be right for you
The U.S. Small Business Administration, or SBA, is a federal government agency that provides lenders with guaranties on small business loans, for use in instances where the business may not otherwise qualify for conventional credit. These so-called SBA loans offer unique options for small businesses who qualify (and want or need them).
An SBA-backed loan could be a good option if you operate in a high-risk industry. If you have shortfalls in your collateral or are looking for a longer maturity than conventional credit can offer, you may want to discuss the option of an SBA loan with you relationship manager.
There are two types of SBA loans: the SBA Express Loan and the SBA 7(a) Loan.
- SBA Express Loans are designed to aid in the growth of small businesses. Lines of credit or term loans can be up to $350,000 with SBA Express.
- SBA 7(a) Loans can be larger, up to $5 million (with an exposure from the SBA of 75% of that, or $3.75 million). These 7(a) loans are term loans for larger business acquisition, startup financing or purchasing real estate. They offer longer-term financing options than express loans.
Talk to a relationship manager about whether an SBA loan might be right for your needs.
What other financing options are available to explore?
The loan you take out can be tailored specifically to the needs of your business. Talk to your M&T bank relationship manager about the financing structures for equipment, offices, manufacturing properties and vehicles.
For all major purchases, there are pros and cons to buying versus leasing. Start a conversation to help you decide what’s best for your business.
This content is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.