Are you about applying for a loan as a business owner or startup entrepreneur? If YES, here are 7 advantages & disadvantages of taking small business loans.
Although having to pay an interest alongside your principal may be somewhat burdensome, taking a business loan has its advantages, as well as disadvantages.
So it is up to you to consider this pros and cons carefully, weigh the options involved and then decide if taking a business loan will be good for your business. Without wasting your time, below are the advantages and disadvantages of taking small business loans:
5 Advantages of Taking Small Business Loans
I. Convenience and accessibility-: Banks are always and readily accessible since they are used regularly for saving and withdrawing money. After using a particular bank for years, the bank becomes convenient and familiar to you, and so it comes to your mind first when you are thinking of taking a bank loan.
Similarly, government agencies that issue loans usually have several offices, thus making it easy for entrepreneurs to approach them. And because of the general knowledge that these agencies have been established specifically for issuing loans to small businesses, they are usually one of the first places to consider for a loan.
II. Multiple options and packages-: All loan-issuing institutions have multiple types of loan schemes for entrepreneurs trying to set up or expand their businesses. These packages vary in terms of principal, interest rates, and repayment period so that entrepreneurs can choose the most convenient ones for them and the most suitable ones for their businesses. Also, having the option to take line of credit loans can help entrepreneurs spend their loans more carefully.
III. No profit or control sharing-: Venture capitalists and angel investors will give you the funds needed to start or expand your business, but they will in return take part of the ownership of your business. This means any profit that comes in will be shared between you and them, and they have the right to influence decision-making. However, banks and other loan-issuing institutions don’t ask for part ownership of your business. If they give you a loan, they are only interested in getting their interest and partial loan payment installments.
IV. Tax benefits-: Small businesses taking loans from banks and some other institutions enjoy some tax relief, since the percentage of profits used to repay the loan is exempt from tax. So, you only have to pay tax on the percentage of profits that you will keep for yourself.
V. You don’t have much to lose- : Another benefit of getting a business loan is that, if your business fails, you may not necessarily have to pay back from your personal purse. In the event of failure, you can liquidate the business, which will help you pay back part—or even all—of the borrowed funds.
In fact, many business owners keep this advantageous aspect in mind when borrowing money, because they will only lose their business in the event loan default, not necessarily their own money or the collateral used to secure the loan. And many creditors accept this repayment plan—of course, they don’t care about whatever you will lose to pay back the loan; all they want to ensure is that you pay back the loan after all.
5 Disadvantages of Taking Small Business Loans
Though some loans may attract very little interest rates and may be repayable over long periods of time, taking loans to finance your business has its fair share of disadvantages. And it is very important that you weigh these against the advantages to figure out whether taking a loan would be a right step for you. Here are the disadvantages of taking business loans:
A. Lengthy application process-: Banks and other loan-issuing agencies need to verify all the credentials and details about your business before approving a loan. Most importantly, they need to ascertain that you are really capable of paying back the loan along with the accompanying interest. All these explain why the loan application process and review always take a long time.
B. Cumbersome process-: Banks and other institutional creditors have a long list of conditions that your business must fulfill before they can take a loan. Trying to meet these conditions (for example, trying to provide certain business details and documents) is always cumbersome.
In fact, most of these conditions, from the entrepreneur’s perspective, are totally unnecessary. And sometimes, it is not possible to meet all of them. This is one of the commonest reasons why entrepreneurs don’t bother giving loan applications a shot.
C. Preference given to existing businesses-: Most banks and some other credit institutions prefer issuing loans to existing businesses rather than startups, because they can easily gauge an existing business’s profitability and credit history before approving a loan. And because new businesses don’t have such records, there is a common fear among creditors that the loans may not be repaid.
D. Risk of losing collateral-: You cannot secure a business loan without some collateral, which is usually your house or other valuable property. Should you fail to pay back the loan within the specified term, you risk losing the collateral. Although, you have the option of liquidating your business, you may still lose your collateral if your liquidations cannot pay the loan completely.
E. Getting entire amount not guaranteed-: Some banks and other credit institutions fail to grant the whole amount requested for a loan. They may grant only 70-80% of the money you applied for—or even less. This will make it difficult for you to implement your business plans right away, since you will still need to approach other sources to get the remaining balance before you can start.
Overall, there is some kind of balance between the advantages and disadvantages of taking business loans. And it is this balance that prompts most entrepreneurs to approach banks and other agencies for loans.