Your company has reached a potentially game-changing moment in its history: It's time to make a big investment.

Things are going well and the opportunity presented may well make your company grow exponentially over the next few months and/or years.

For the purpose of this exercise, it doesn't really matter what the investment is, but let's say you need $500,000 - a far bigger amount than you've ever sought.

After conducting your due diligence about loan opportunities, two options emerge as the best possibilities.

A.      A local bank offers a conventional term loan for five years at an interest rate of 5 percent. Your monthly payment would be about $9,436.

B.      A Small Business Administration-backed (SBA) lender offers a 10-year loan at an interest rate of 7 percent. You'd be paying about $5,805 a month.

Which do you select?

Depending upon how quickly you generate cash, the first option might be best for you. And logically, it looks like the best deal -- you'd be paying only $66,137 in interest over the course of the loan, compared to $196,651 with the SBA loan.

Surprisingly, though, more often than not, the SBA loan, while not the better "deal," might be the best option.

How so?

As mentioned above, your company is at a pivotal point in its life cycle. This loan is a significant step ahead, and it's certainly a bit nerve-wracking. In all probability, you're stretching yourself to the brink of your comfort level.

And that's why you should seriously think about the SBA option -- because the longer amortization period  and lower payment gives you some much-desired flexibility.

By paying $3,600 a month less in loan repayments, you retain the ability to put out any fires that spring up.

What happens if a key piece of equipment breaks and needs to be repaired or replaced?

What if you get the opportunity to buy some raw materials at a rock-bottom price?

What would you do if you found yourself facing unexpected legal action?

None of those situations are ideal, but things happen. With the SBA loan, you may still have the bandwidth to deal with them. With the first option, you'd probably be overextended and could be forced into a loan with rather unfavorable conditions.

This all goes back to a common theme many entrepreneurs -- especially newbies -- fail to understand: Debt is not necessarily a bad thing.

Debt is a tool that can be made to work for you. Without it, how could you afford your house, your car or your kids' educations? Broken down into bite-sized pieces -- a/k/a monthly payments -- they allow your both personally and professionally the chance to live your life.

Granted, debt must be carefully managed, something that a good chunk of the public at large and a percentage of business owners fails at miserably. But that's why you do your due diligence and carefully consider all financial options and scenarios before leaping ahead.

And if you're still not sure, that's what financial advisers are there for. Never be afraid to ask an adviser or a trusted mentor for a second (or third) opinion.

Published on: Feb 28, 2018
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