Thinking about financing a new enterprise with a bank loan? What are the advantages and disadvantages of bank loans for small businesses? Setting up a small enterprise in the heart of opens doors to lots of growth opportunities. With your idea and passion, the only giant roadblock called “financing” would be the only thing standing between you and success.
With a nicely packaged bank loan, your idea can transform into the flourishing business of your dreams. But just like any venture, it comes with its perks and snares. What are some of the advantages and disadvantages of loans from financial institutions that you need to be aware of? Grab a cup of coffee, get settled, and let’s dive into the world of bank loan financing for micro and small businesses.
Why Opt for A Bank Loan to Finance Your Business?
Apart from bank loans, there are plenty of other ways to obtain funding. But bank loans have the potential to expand your business progressively. While it’s a no-brainer that banks may have tough eligibility criteria, with a little help from a trusted partner vouching for you, it shouldn’t be difficult.
Today, about 60% of small and medium-sized enterprises (SMEs) rely on bank loans to sustain and grow their enterprises. With stiff competition from every corner, the chances of thriving are slim. But if you do it right with proper funding, your business can experience exponential growth within no time. That’s just a reason why many SMEs choose bank loans; here are more:
Balance cash flow problems
Whether you are just starting a small business or already have established one, navigating the competitive business environment can be tricky. Without a proper cash flow, the business can be on the verge of collapse. Bank loans help a great deal in meeting the cash flow needs and maintaining key operations.
Restocking inventory
When your stock is running out, businesses opt for bank loans to reinstate their stock and keep things moving smoothly. Businesses can decide which option best meets their needs by considering the advantages and disadvantages of lending money from banks.
Speed up business expansion
A great way to stay competitive in the business world is to seek expansion opportunities. Businesses go for loans to meet their financial demands during expansion.
Build business creditworthiness
Running a business with a good credit score means access to financing whenever you need it. Bank loans can significantly help build stronger creditworthiness, which allows businesses access to other forms of funding.
Advantages and Disadvantages of Bank Loans for Small Businesses
Before jumping on to the bandwagon of bank loans, it’s essential to prepare yourself with information about bank loan advantages and disadvantages.
The Good – Advantages of Bank Loans
Easy access and convenient
When looking for financing from investors, you may need to be connected to them through someone else. It may also involve trying to get a slot in their busy schedules and at the end of it all, emerge with nothing! However, accessing a bank loan is much easier and more convenient; simply walk into your bank and express your interest in getting a business loan.
Most entrepreneurs don’t have the luxury of time; every minute matters. Waiting for investors’ input or your profits to grow to re-invest may take much longer. Although applying for a loan may take some time, it’s less demanding compared to other methods.
Cash injection
Going on a treasure hunt and starting a business are metaphorically the same. When venturing in, you just know that there’s a trophy somewhere waiting, and you need a shovel and map to hunt it down. In that essence, the map is your business plan, while the shovel is your bank loan!
A bank loan can grant a startup the cash injection it needs to keep things moving. A business that’s already running can gain the financial boost it needs to explore greater heights.
You take the profits alone
Once the terms of a business loan are set, there won’t be a time when the bank will demand a percentage of your profits. Everything generated with the loan will be yours. But with investors or partners, it’s a different story; you must give them a percentage share of what the business makes.
Since the repayment amount to the bank is fixed, you’ll have more opportunities to expand your business. The surplus of your profits can easily be injected into the business.
Access to competitive interest rates
Most banks have one of the best interest rates. This makes bank loans in the country more appealing to businesses than other forms of funding. You just need to go a notch higher by comparing loan offers from different lenders.
While not every entrepreneur has the time for that, working with a trusted agency allows you to land the best bank loan deal in the market. With a lower interest rate, you’ll get to repay less over time, giving you more resources to cater to other parts of your business.
Structured repayment plans
When thinking about the advantages and disadvantages of bank loans for small businesses, the topic of repayment plans will never fail to pop up. Most banks have structured repayment plans, which means monthly loan payments. It grants many small enterprises some financial stability, which is crucial, especially during the early phases of unpredictable growth.
When it comes to finances, everyone loves predictability. When you know exactly how much you’ll be repaying every month makes planning a breeze. It’s almost similar to having a financial advisor who never fails to show up when needed, and doesn’t charge you by the hour.
Business credibility boost
Imagine yourself at a networking conference, interacting with potential investors, partners, and customers. Suddenly, your business becomes the subject of conversations, and you mention that a bank recently gave you a loan to finance its expansion. From that moment on, you become an entrepreneur and a savvy one. It shows how serious you are about your venture, and that has the potential of drawing partners and investors your way.
With the support of a credible financial institution, you’ll become more confident, and new opportunities will come knocking.
Complete autonomy in allocating the funds
One of the most inviting bank loan advantages is that banks will never meddle in the affairs of your business, unlike investors. If an investor sees the potential in your business, they’re more likely to demand to know how things are running, unless it’s a silent one. The entire business budget will have to be discussed and approved by the investor before pumping in their cash.
Banks don’t work like that; they simply don’t care how you allocate the funds obtained as long as they receive back their dues with interest. You, the entrepreneur, have the sole responsibility of choosing where you put the money. So, if you’re looking to maintain your authority over your business, bank loans are the sure way to go.
The Bad – Disadvantages of Bank Loans
The bulk of the paperwork
You’ve cracked up your wits to create a million-dollar business idea, come up with a business plan, and are well-prepared for the world of entrepreneurship. What’s next? A mountain of more paperwork! When applying for a bank loan, be ready to prepare more documentation to support it. banks don’t joke with their paperwork.
Among the different bank loans disadvantages, filing paperwork has to be the most time-consuming and draining for small businesses. You must share your financial statements, credit reports, business plans, and personal finance information. The process can be a real headache, almost similar to writing an epic novel, and is full of financial jargon. Most shrewd entrepreneurs choose to avoid this bit by working with a renowned loan brokerage firm.
Tough eligibility criteria
Do you recall that ‘treasure map’ (business plan) we discussed earlier? It’s not going to be all you need to unlock banks’ treasure chest. banks are not afraid to apply their standards when assessing the eligibility of entrepreneurs.
Some of the things you’d expect to meet include providing business history, credit score, financial stability, and in some cases, collateral. Businesses at an early age or those with a rollercoaster ride kind of credit score are more likely to get rejected.
Meeting these and several other criteria adds to the list of disadvantages of loans in business that can be a turn-off for some entrepreneurs.
Collateral conundrum
There’s a saying that goes, “You need money to make money.” Well, when it comes to the universe of loans, it simply means that you have to have assets to qualify for a loan. Some banks might demand collateral, a valuable asset that acts as a backup in case the loanee fails to settle the borrowed amount.
Bank loan collateral may take different forms, from vehicles to real estate. Some banks can also accept business assets such as equipment or inventory. While collateral offers the bank security, it poses risks to the borrower. If you cannot settle the loan, you may lose the asset.
The stress of accruing interests
Earlier we mentioned that bank loans offer competitive interest rates. Well, there’s a flip side to it. Even though an interest rate may be competitive, it still means you could end up paying more than the principal amount. Let’s just say that this aspect is a one-liner for the advantages and disadvantages of bank loans for small businesses. While it presents an enticing perk, it also has a downside you’ll have to live with.
Interest on long-term loans can add up to huge amounts, therefore, it’s important to consider this fact when planning your finances.
Summing It Up
There you have it – the advantages and disadvantages bank loans present to small businesses seeking financing. It’s a journey full of excellent opportunities, paperwork-induced yawns, and caffeine-induced highs. The important thing is to weigh the perks and pitfalls, explore available options, and make a sound financial decision that can propel your business.
Apart from just looking at the advantages and disadvantages of bank loans for small businesses, you’ll need professional assistance to help you navigate the hurdles. In this case, a loan brokerage firm that understands the bank loan markets well, such as market/finance analyst can make a big difference. Apart from getting better interest rates, you can avoid tough eligibility criteria and secure bigger loan amounts that can turn your business around for the better.
