Reviewed on 18 February 2020
There are plenty of different paths available to you if your business needs some fast money. You could look to reinvest the profits of the business. Or you could try to find an investor or business partner who will inject some cash into the enterprise.
But what we’re going to look at today are business loans. These are common forms of financing for businesses. But before jumping in and applying for a business loan from a bank, you need to learn more about what’s the pros and cons about this kind of financing.
Below, you will find plenty of information about the advantages and disadvantages associated with taking out a loan for your business.
Banks Don’t Try to Influence How the Money is Spent
Unlike investors, a bank is never going to interfere with how your business is run. If you find an investor, you will have to work alongside them. And unless they’re a silent partner, they will expect to have a say in how their money is spent by the business. On the other hand, banks don’t care what you do with the money if you’re going to be able to pay it back with added interest. What happens in between now and then is entirely up to you. So, if you want to retain full control over your business and how it grows and expands, a business loan is usually the best option.
They’re Convenient and Easy to Access
It’s easy to get in contact with your bank and talk to them about the possibility of taking out a business loan. This convenience and ease of access is something that can be good for businesses. Most business owners don’t have time to waste. And waiting for profits to grow in order to reinvest them can take a long time. The same applies to looking for investors. It’s a long process, and it can drag out for a long time. Of course, loan applications can take a long time to be analysed and accepted, but they are easier to deal with compared to alternative options.
Reasonable Interest Rates
The interest rates attached to most business loans are very good. Banks are competing for customers, so they are obligated to offer a deal which is at least in line with what their competitors are offering. Of course, the interest rates are still going to allow enough room for the banks to see a healthy return on their profits. But the rate you get is often better than most personal loan options. On top of that, the interest you pay is often tax deductible. You will have to check with your local authority to see whether this is the case for your business, though.
The Profits Will be All Yours
Most business owners take out a business loan because they want to expand their business or push it in a new direction. This means that they want to make it more profitable. If you get this money from an investor, they will expect a return on any money you make. The performance of the business will be directly linked to how much they get in return. That’s not the case when you take out a loan, though. The returns are fixed, meaning that you will pay the same amount of money back to the bank no matter how big or small your profits become as a result of your investment.
Not All Businesses Will Qualify for a Loan
There are lots of strict rules and conditions that banks have in place when it comes to approving or rejecting business loan applications. Not all business will meet the criteria laid out by the banks. So, you will need to know how the banks analyse applications before you go ahead with your application. You don’t want to waste time on an application if there is no chance of it being accepted by a bank. Dealing with a rejection can be difficult to bounce back from too. You can be left wondering where you should turn next to get the money your business needs.
They’re Often Secured Against Assets
Many bank loans are secured against an asset owned by the business. The risk of this is that the asset can be seized by the lender if you fail to make the repayments on the loan you take out. Of course, you will probably think that this won’t become a problem for you. But that’s what everyone says when they take out a secured loan. It only becomes a problem when your business’s profits are not as healthy as you had hoped for and you’re no longer able to make those repayments on time. Think about this carefully before taking out a loan.
You Might Not be Granted All of the Money You Requested
Another thing bank do when responding to loan applications is only grant some of the money that’s requested. They might think that a business doesn’t need all the money that it is asking to lend. It’s not uncommon for banks to approve a loan on the condition that only 70% or 80% of the money is given. This can be frustrating for business owners who already have fully costed plans in place. It can force them back to the drawing board to cut costs and find ways to carry out their plans in a way that is more affordable. In truth, it’s a headache many business owners could do without.
In conclusion, you need to make sure that your business is always careful when it comes to borrowing money. Loans can be great solutions for businesses that don’t want the hassle that often comes with finding an investor or business partner. However, ensuring that you will be able to pay back the amount that you borrow is essential because your assets could be taken from you as collateral if you fail to make the repayments.
BizSquare is the one-stop business consultancy providing business, property, sme and working capital loans in Singapore. Furthermore, Bizsquare also provides invoice financing, mortgage broker, private financing and business overdraft.