There are many benefits of lending to a small business, from helping entrepreneurs start their businesses to providing small businesses with access to capital that they may not otherwise obtain from traditional lenders. Lending also allows you to diversify your portfolio by including riskier asset classes like small businesses or high-yield securities, and it can provide tax advantages. To maximize your return on investment, here are 10 benefits of lending to a small business.
1. Better Chance at Loan Approval
When you need capital for your small business, it can help if you have a personal relationship with your banker. Bankers are more likely to approve loans for their existing customers than those they don’t know.
2. Lower Interest Rates
When lending money to businesses, you typically pay a lower SBA loan interest rate than you would for personal loans. When applying for a business loan, your credit score must be good because lenders use it as a benchmark for their interest rates.
3. Increased Revenue
Having access to capital allows businesses to expand their services or product offerings, making them more competitive. This will attract new customers, leading to increased revenue for your business.
4. Increase in Employment
Small businesses are major job creators. For every 1,000 jobs created by large corporations, 3,900 jobs are created by small businesses. That’s 900 more people that aren’t out of work. Not only do small business owners create new jobs, but they also tend to be better at keeping them than their corporate counterparts.
5. Higher Asset Value
A business loan offers to fund, but it also raises your company’s worth. Whether or not you decide to pay back your loan in full, it’s an asset that can be used as collateral for future financing.
6. Low Risk to Borrower
Because small businesses are more likely to stay in business longer than individuals, lenders have greater assurance that they will receive the full payment. However, some lenders may require borrowers to have collateral for loans with high amounts or significant terms.
7. Underwriting Ease
Small businesses are often appealing because they have much lower credit profiles than larger enterprises, making it easier for lenders to complete their underwriting requirements. However, that’s not always true. Sometimes small business owners have bad personal credit or lack sufficient collateral to secure loans from banks and other traditional sources.
8. Focus on Credit History and Income
Banks look at your credit history and income when evaluating small business loans. When your business’s credit history is weak, banks will make you pay higher interest rates to compensate for that risk.
9. Tax Deductions for Borrowers
According to Lantern by SoFi, small businesses that borrow money are much more likely to survive than those that don’t. And if you do take out a loan from your bank or credit union, you may be able to deduct some of your interest payments on your taxes. This can make borrowing even more worthwhile.
10. Streamlined Processes
Working with smaller businesses can make it easier to get your loan approved, whether you’re working with a traditional private bank or an online lender. A streamlined process means less paperwork and less hassle.
Starting a small business requires you to make tough decisions about money. We hope that we’ve made it a little easier for you by outlining some of your options for getting capital for your new business.