What Are the Risks of Using a Small Business Loan?

Dec 5, 2017 | Alex Coleman

Like most things in life, owning a business doesn’t always work out exactly as you expect it to. The popular belief is that successful business owners have lots of time on their hands to take long vacations and are able to throw money around as if they had a machine printing it in their office.

But the last time most successful founders or freelancers went on an exotic vacation was when they flew to a conference where they only saw the inside of the airport hotel and conference center. Similarly, most founders I know pour all their money into their companies — and then some.

After all, cash flow is a real problem for most small or new businesses, and that leads many companies to resort to small business loans to fund their business. But while there are lots of online lending options now that will get you cash quickly, there are a number of downsides to funding your business with one of these loans, so it’s important you consider them before signing on the dotted line and taking the money.

1) Online Business Loans Aren’t All Created Equal

If you’ve ever researched online business loans, you likely noticed that some have unique terms. Rather than regular interest charges, they have fees that you have to pay which they front-load at the beginning of your term. This means you can’t save by pre-paying your loan. Others have very high interest rates. Or they require you to use your personal credit when you apply. Online business loans are much more complex and potentially costly, as you would expect, so it’s critical that you read all the fine print before you decide to borrow. You could be better off getting a personal loan than an online business loan. While you won’t be building business credit, you might save money on interest.

2) Taking on Too Much Debt

Think you’re too successful to go bankrupt? Successful businesses go bankrupt every day because at some point they made a business decision to borrow more money than they could afford. Before you take out the most you qualify for to borrow, have a look at the financials behind the loan to make sure that you’ll be able to easily repay it and that it won’t compromise other parts of your business.

It might seem like a great idea to get a new piece of equipment to expand your capacity, but if you no longer have money to market your products because you’re paying back your loan, that expensive equipment is going to sit idle.

3) Risking Personal Assets

Entrepreneurs put their blood, sweat, and tears into their businesses — and they also put their assets on the line. If you borrow money for your business, you may have to put up collateral like your car or your home. If your business goes bust, you could then end up losing everything.

So, Make Sure the Loan Makes Business Sense

Just because there is money available for small business owners like yourself to borrow doesn’t mean you should. If you’re a freelance photographer or writer and you want a new camera or a laptop, you might consider taking out a loan to get one. But will it actually increase the amount you earn?

If your laptop is broken — it absolutely will. But if you just have an older model, you might be better off saving up or buying a cheaper model than going into debt. As a freelancer, your income isn’t guaranteed, so you could struggle to make your monthly debt payment.

Alternatives to Small Business Loans

So, if online small business loans might not be the right choice for you, how do you expand your business? There are lots of alternative options. If you still want to take out a loan, you could get a loan from a friend or family member, take out a personal loan, or get a Small Business Administration (SBA) loan. You could also give up equity in your company in return for an investment.

There are also now other creative ways to fund your business such as invoice financing, where a company borrows against its unpaid invoices. Other options include revenue-based financing that gives you more flexibility in your repayment or inventory financing. You might also decide to get a credit card with a 0% introductory rate and charge your purchases on your card with the goal of paying it off before it comes due.

There are a lot of great alternatives to small business loans — including saving up until you can afford to buy it without borrowing!