Business Loan: 6 Advantages and Disadvantages of Applying for a Business Loan

Business Loan: 6 Advantages and Disadvantages of Applying for a Business Loan

Business Loan: 6 Advantages and Disadvantages of Applying for a Business Loan | Whether you want to expand your business, refinance a loan, recruit top talent and invest in business development, invest in marketing efforts, a business loan might be the answer to your needs. Whatever the reason might be for a business to apply for a business loan, it’s useful to learn about advantages and disadvantages. This way you’ll make sure you choose the right lender for your business.

Advantage: Flexibility – Bank doesn’t have a say in how you spend the money

Once a bank approves the business loan, and you receive the money, the bank won’t meddle in how you spend the money. In other words, if you go to a bank for a business loan, you’re given the flexibility on how you spend the money. Banks are only interested in the agreement of the loan you agreed on in the first place (interest rate, the number of payment instalments, duration of it and so on). The bank won’t have any say in how you spend the money. 

Disadvantage: Banks are not sympathetic if you miss an instalment

This is the downside of getting a bank loan you can spend freely. You are expected to repay the amount you agreed on in due time. You can’t be late with a payment. There might be penalties involved, and this might have a negative impact on your credit score. Since you want to be eligible for another loan in the future, you don’t want to ruin your credit score. Make sure you never miss a payment and always plan your finances in advance and consider equated monthly instalment of your bank loan as a priority.

Advantage: The terms of a loan can be flexible as well

Whether you need a short term inflow of cash or a temporary financing solution, a bank loan is a viable option. The shorter the loan tenure (the time you have to repay the loan), interest rates will be lower. On the other hand, the longer the tenure, the interest rates might go up. And this is what makes the terms of the loan flexible. It’s up to you to decide what works best and which amount plus interest rates is affordable. Repaying the loan quicker is always best before the interest rates will be lower. At the same time, it’s not about the speed, it’s all about having enough money to repay each instalment on time to avoid penalties. Word of advice would be to think about everything thoroughly in advance.

Disadvantage: You might get rejected

There’s a chance you might not be eligible for a business loan. Banks have lengthy and rigorous approval requirements. This is a relatively likely scenario, so you should always be prepared for such a turn of events and have a backup plan. You can go to a private lender and apply for one of many available business loans. This is a secure option just like a bank loan, without any hidden fees, unexpected requirements and it’s also less of a struggle. Of course, you should also consider interest rates before applying for a loan from a private lender. Just remember that there are options to choose from when you look for a business loan.

Advantage: It’s a standard process

Going to a bank for a business loan is a standard procedure. You don’t have to tell every detail of your story and hope for the best. This is something you would usually do if you went to a friend or a relative for a loan. This is something that can ruin a relationship or put it under a lot of pressure. Banks have rules and regulations you accept if you’re eligible for a loan. Borrowing money from a bank is a standard procedure done by many people, especially in business. You’ll just have to tick all the boxes by delivering all the necessary documents, statements and other rules of engagement. You won’t have to overexplain or wait for the perfect moment to pop the question. Everything is transparent and clear (if you read the fine print and ask the right questions).

Disadvantage: Each bank has its own set of rules

You know the saying – Terms and conditions may apply. The same can be said during the process of applying for a bank loan. You need to read the fine print and don’t be afraid to ask questions. Whenever you’re not sure what you’re signing up for, ask for clarification. This is important because banks are known to lave ll these fine details for the last stage of acquiring a loan. On that note, discuss all other fees and conditions there might exist when signing up for a loan. There might be different penalties, hidden fees, or even a clause that prohibits you from repaying the loan earlier than you agreed. Just make sure to discuss terms, conditions and fees.

As you can see, there is an equal number of advantages and disadvantages of applying for a business loan. It’s your job to consider each one of them wisely and learn everything you can before you apply for one.

Mike is an Australian business consulting specialist. He’s working with companies that outsource their IT maintenance. He often writes about technology, business and marketing and is a regular contributor on several websites.