Pros and cons of business loans
Business loans are important for financing a business and there are many types of loans and lenders with very attractive packages available in the market.
You may, however, need to know the pros and cons of taking business loans, weigh them carefully and make the decision of whether to get one or not.
Pros of business loans
· Unless you make them silent partners, the lender does not become a part of your business and will not have a say in how your business runs. As long as you repay your loan, the profits are yours to keep.
· You may get good interest rates depending on the lender you approach. Business loan interest rates are normally lower than the interest charged on personal loans.
· Interest payments are sometimes tax deductible. Find out if your business qualifies for this.
· Many types of loans available. You can decide on the interest options for instance variable vs. fixed loans. You also have the option of unsecured loans although these charge higher interest rates than secured loans.
· The loans are normally easy to get and you can access large amounts of money at relatively short notice.
Cons of business loan
· Your business may not qualify for the loans. There are conditions that need to be met for your loan application approval. You need to have a proper business plan in place together with a profit prediction for your business. Make sure you are fully conversant with their requirements before you start the application process. Even with the approval of your loan, the lenders may not grant you the full amount you requested.
· Loan approvals require your credit rating to be good, poor credit history can lead to rejection of your loan application.
· If you decide to take a secured loan, you need collateral to get the funds. You can use the business assets as security. If you are unable to pay the loans, the bank can seize the assets and sell them, normally at a lower price, to recover their money
· If you take a variable interest rate business loan, you will be open to the unpredictability of the financial markets. If interest rates rise, the business will have to pay the adjusted rates meaning that the impact on a small business, especially a startup, can be hard to adjust to. Businesses that may have not started making profits may not afford the payments leading to defaults.
· The loan appears as a liability on your balance sheet and can affect your business valuation.
Be careful when borrowing money for your business. Though a great solution for your business, they do add to your debt burden. Ensure that you pay back the money in the stipulated period so that you do not affect your credit rating or lose the assets you used as collateral.
Always engage the services of an expert to walk you through the loan application process.