Pros and Cons of Having a Business Loan
Benefits and challenges of Having a Business Loan
Getting a business loan can be very double-edged for business owners. On the one hand, the capital you get can finance your business projects, supplement your cash flow, and purchase business equipment. But business loans have downsides as well. This includes the obvious risk of defaulting your loan payment and losing whichever assets you set as collateral.
This article has an in-depth analysis of the advantages and disadvantages of taking a business loan. Read on to better understand and help you make a more informed decision.
What are Business Loans?
Business loans are loans meant for use by a business. They are debts to be repaid at interest after a specified duration of time. The business receives the money and invests the capital or uses it to clear payrolls, purchase equipment, etc. During repayment, regular payments called installments are paid to the lender until the borrowed amount plus interest is cleared.
The Benefits of Taking a Business Loan
Business loans can be very beneficial. Below are some of the benefits of getting a business loan:
Helps in the Acceleration of Your Business's Growth
With proper planning, the loan taken can be used to kick start the business’s growth. Instead of waiting for your profits to grow, your money can allow your plans to come together sooner.
Removes the necessity of relying on Investors
Business loans give business owners a cash boost and therefore remove the necessity of relying on investors. Therefore, the business owner can retain sole ownership and control over their business and keep all the business’s profits. Unlike an investor who gets a certain percentage of your company and is often there to stay, loans are temporary measures that go away after repayment.
Helps Overcome Issues with Cash Flow
Businesses that hit cash flow issues can get business loans to supplement the cash flow. Issues with cash flow are usually pervasive in small businesses that have started growing rapidly. The business owner can take a cash loan to ensure that the business keeps running smoothly and maintains its growth trajectory.
Cash Loans are Flexible
The board often controls money from investors rather than the business owner. This means that the investors get to have input on how you spend the cash - they can restrict what you can do with the money. Business loans, on the other hand, can be used however you choose. They have no restrictions.
Business Loans are Often Less Expensive than Other Loans
Taking a business loan can be better than using overdrafts, credit cards, or personal loans to finance your business. Businesses that have built up strong credit profiles should opt for business loans as they can get low-interest rates and better terms.
Disadvantages of Taking a Business Loan
The following are downsides of taking business loans:
They Have a Long Application Process
Lenders usually require a lot of paperwork when you are applying for financing. This is because they evaluate your business’s ability to repay the loan before extending the finances. A company plan and two years of tax returns are all that are needed to qualify for a loan from the Small Business Administration. Using a Loan servicing software can smoothen the process.
Defaulting on Payments can Lead to Loss of Assets.
Most lenders will require the business owner to offer collateral as security for the business loan. Defaulting on the loan will lead to the loss of the asset you put up as collateral. While you can put up a business asset, a new business owner would be required to use a personal asset, such as their house.
The Loan Takes Time Before it is Released
Business loans usually take longer than other loans for the underwriting to be completed and for your money to be released. Approval and release of the funds can even take a couple of months when applying for more favorable loans like SBA loans. Business loans are, therefore, not a good solution for business loans that need the cash immediately.
Repayment of the Loan is not Flexible
Most business loans do not have flexible repayment terms. The lender requires you to make a predetermined installment regularly until the loan is fully repaid. Businesses with fluctuating revenue should avoid business loans for this reason.
Taking a business loan comes with many disadvantages and advantages. Remember that the most important thing to consider before taking the loan is how to use the money. This ensures that you put the money to good use.
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