What are the pros and cons of availing business loan?

The start-up costs for a new business can be considerable which are the purchase of goods and equipment, marketing costs, payment to the employees and thus the list goes on. It’s not always feasible to bootstrap the way through major expenses, and the businessman may want to consider external funding. Loans from the commercial lenders like banks or the private lending institutions may thus be an option, but the borrower should consider the pros and cons of seeking a commercial loan. The article below tells us about the pros and cons of availing a business loan.

Pros

  1. Flexibility
    Owners may thus avail different types of loans and it depends on their fund requirements. Companies may, however, choose term loans for the purpose of meeting the fund requirements in the short to long term. Alternatively, they may also opt for working capital loans in order to meet the operational expenses of the business. Another alternative is thus an overdraft facility whereby the promoters may overdraw the current accounts as per the agreed terms and conditions. The flexibility also makes it easier for the promoters to avail a business loan.
  1. Convenient Repayment Options
    The promoters are always offered different repayment options as per their convenience. They, however, may work out a repayment plan as per the business cash flows in order to avoid facing the financial difficulties while servicing the loan.
  1. Affordable Costs
    Contrary to the popular belief, the business loan rates are thus not exorbitant. These are thus determined based on the several criteria, such as tenure, the financial situation of the business, market dynamics and the borrowers’ credentials. In addition, the commission and the processing fees are thus nominal, which however make it easier for the businesses to borrow money from institutions.
  1. Sustain and Grow BusinessCompanies are also able to meet the funding needs n order to efficiently manage their operations as per the business cycle. Moreover, the businesses in the expansion mode are thus able to use the borrowed amount in different ways in order to move up in the value chain. Most of the lenders do not specify the uses of the loan amount, which thus means that the owners have the versatility to utilize the funds as per the needs of the business.

Cons

  1. Covenants

While debt provides the small business owner with more flexibility over time, the bankers usually create rules about how much additional debt the business can take on and then the fact as to how much the business can spend on the inventory or other investments. These rules are thus referred to as covenants in the banking world and the more money a bank lends to a small business, the more covenants they are thus likely to place on the loan in order to ensure the payback of funds.

  1. Lack of Flexibility

Although the covenants can be restrictive, the terms and conditions of the loan can thus also create a great deal of inflexibility in the business operations. You are thus required to make all the payments on the agreed-upon dates in which the amount is due.

  1. Interest Rates

Rarely do the banks give away money for free and the cost of money is thus referred to as the interest rate. This rate would usually be higher for the small businesses than the larger, more established businesses as they are deemed riskier. This interest is a real cash expense that however affects the bottom line. The higher the interest rate on the bank loan, the less money the borrower has to pay back the loan, which thus has the potential in order to create a cycle of debt if it is not managed properly.

  1. Cushions of Protections

Most of the small business lenders, however,  require some amount of collateral in order to secure the loan. Also, it is referred to as the  “cushions of protection,” collateral is thus anything that can be sold in case the borrower defaults on a loan repayment. It is not unusual for the small business owners in order to put personal assets on the line as the collateral that includes the retirement plans, investment securities, real estate and other real property.

By | 2017-11-06T06:22:48+00:00 November 6th, 2017|Business Loan|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

Leave A Comment