It’s not always feasible to bootstrap the way through major expenses, and the businessman may want to consider external funding. Loans from commercial lenders like
- Banks or
- The private lending institutions may be an option, but the borrower should consider the pros and cons of seeking a commercial loan.
The start-up costs for a new business can be considered which are
- The purchase of goods and equipment
- Marketing costs
- Payment to the employees etc.
Pros of business loan
- Owners may avail different types of loans and it depends on their fund requirements.
- Companies may choose term loans for meeting the fund requirements in the short to long-term.
- Alternatively, they may also opt for working capital loans to meet the operational expenses of the business.
- Another alternative is 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.
Convenient Repayment Options
- The promoters are always offered different repayment options as per their convenience.
- However, they may work out a repayment plan as per the business cash flows to avoid financial difficulties while servicing the loan.
- Contrary to the popular belief, the business loan rates are thus not exorbitant.
- These costs are based on several criteria such as
- The financial situation of the business
- Market dynamics, and
- The borrowers’ credentials.
- Also, the commission and the processing fees are nominal, which however makes it easier for the businesses to borrow money from institutions.
Sustain and Grow business
- Companies are also able to meet the funding needs and 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 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 of business loan
- 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 to ensure the payback of funds.
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.
- The interest rate would usually be higher for 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. It has the potential to create a cycle of debt if it is not managed properly.
Cushions of Protections
- Most of the small business lenders require some amount of collateral to secure the loan.
- Collateral is anything that can be sold in case the borrower defaults on loan repayment.
- It is not unusual for the small business owners to put personal assets on the line as the collateral that includes
- The retirement plans
- Investment securities
- Real estate and other real property.
The lender may reject the business loan application because of flaws that you should be aware of.