What’s at risk when you take out a small business loan – KTVZ

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What’s at risk when you take out a small business loan?

A handshake is done on a table and a laptop.

If you’re running a small business, you may need to raise some capital at some point. There are many options for doing this: borrowing from family or friends, taking out a small business loan from the bank or relying on your credit cards. But no matter how much money you scrape together, it’s important to consider how you’ll pay it back.

Westfield He used industry sources and news coverage to compile a list of potential risks involved in borrowing money for small business financing. According to the Federal Reserve’s Small Business Report. About 3 out of 4 organizations are salaried employees In the year It had outstanding debt due in 2022. Among businesses with debt, 40% borrowed $100,000 or more. Companies must repay loans over time, which can burden their business’s earnings.

Those looking to avoid loan or credit card debt may seek investors to provide equity in their business. However, this strategy has its risks. The more ownership you offer to outside investors, the less control you have over your business strategies.

Whatever type of business financing you decide to pursue, make sure you understand the long-term consequences and risks that come with it.


Defaulting on a loan

A small business owner looks down at her laptop.

When looking to raise money for your small business, a traditional loan from a bank may seem like the most obvious solution. Here are a few options, including a traditional business loan from your banking institution or one backed by the Small Business Administration. SBA loans are a little easier to get approved because they are backed by the government and have less risk for lenders.

No matter what kind of loan you take, defaulting or defaulting on the loan can have serious consequences. You’ll lose any collateral you’ve provided, and your business and personal credit scores could take a hit. Most SBA loans require a personal guarantee, which means your lender can seize your personal assets if you can’t cover the costs.

Before you borrow money, it’s important to have a repayment plan and only take what you need.


Demand increases

Two small business owners review their finances in an empty restaurant.

Another alternative to a small business loan is to pay for business expenses using a personal or business credit card. A credit card ensures that you can pay your bills on time, even if your cash flow is irregular, as you can pay your bills later or over time.

That said, credit cards are not a reliable source of funds. Most credit cards have very high interest rates that can spiral out of control if you default on your debt. of Current average business card APR It’s 22.70%, and since credit card APRs are always tied to the prime rate, you may experience increases and fluctuations over time.

Not to mention, credit cards don’t come with a set payment schedule like a loan. In order not to burden yourself with debt for a long time, you should be penalized with monthly payments.


Switch control

Two people have a serious conversation in an office.

If you’re worried about the implications of borrowing money from a bank or credit card company, you can look into angel or venture capital investing to support your business. In this case, they provide equity in the business to secure the funds they need to keep the business going.

The danger in this method comes if you transfer too much control into the hands of investors. The more equity you set aside, the less control you have over your business. Think carefully about how much you’re willing to part with and how much you trust the input of the investors you bring in; Especially if you are providing the majority.


Communication failures

Three hand gestures like having a serious conversation.

Finally, borrowing money from friends or family may be an option. You can also negotiate repayment terms and interest with the right lender.

Again, this is very dangerous for personal relationships. In the year A 2022 CreditCards.com survey found that among respondents who lent money to friends and family; 59% of them had a bad experienceIncluding not refunding their money or ruining their relationship. If the relationship is important, consider how borrowing money can change it.

This story originally appeared on Westfield and produced and
Distributed in partnership with Stacker Studios.

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