A Business loan is simply an amount of money that you borrow from banks and/or other finance institutions for business goals (paying for assets, launch a new product etc…) and that you are obliged to repay over an agreed period of time in addition to interest.
However, The harsh reality about business loans is that they are harder to get.
Many banks today have sorted up a list of pre-requisites before applying for a bank loan such as (a stable income, and a decent business plan).
Even so, many companies apply for business loans without even fulfilling the bank’s pre-requisites because sometimes it can be the ONLY solution available for them to survive and to maintain their operating cash flow.
But like many other means of finance, bank loans also come with their share of advantages and disadvantages.
Advantages of Bank Loans for Small Business
You maintain ownership of your company.
Unlike receiving funds from a private investor, whom in most cases will lend you money in exchange of percentage of shares in your company, borrowing funds from banks will not give them the permission to interfere in your business. You are obligated to make the agreed-upon payments on time without outside interference.
Tax and Financial Planning Advantages
Taxes authorities allow businesses to deduct interest from the gross income and therefore making them benefit for a tax relief by lowering the taxable income.
Disadvantages of Bank Loans for Small Business
Long list of conditions
Banks may have a very long list of pre-requisites that companies should fulfill before applying for a loan. So if the company is enable the fulfill the conditions, its demand for a loan may get rejected!
Banks may require some sort of security/Collateral to obtain the loan or something that simply guarantee for banks that you are going to pay back the loan, for this reason, your loan may get secured against your personal property or assets.
Therefore, If your business doesn’t make it, You’ll end up not ONLY losing your company but also your personal property.
You MUST pay back the loan (Even if your business is NO longer profitable)
In banking world, the rules are clear.
If you’ve successfully secured a loan, you MUST pay back the initial amount plus interests to the bank, even if your business goes under.
If You have just started a business, than considering a business loan can be very dangerous, because you’ll have to make payments on time even if you’re facing some operating liquidity problems.
So before taking out a loan, ensure that you are able to pay it back even you encounter some financial difficulties.