Business Loans with the Pros and Cons
A business loan is a means of providing a solution for a variety of either positive or negative situations, but as with any type of lending application, your first action should be to determine the “Pros” and “Cons” that go with it! These could vary, depending on what your specific needs are and the type of loan you choose. The three primary factors that can influence the choice of a certain product and provider are;
- Loan period and attached conditions
- Rate of interest payable
- Required term for repayment.
An example of a typical “Pros” and “Cons” situation related to a small business loan is that although the loan is convenient and accessible, it depends on whether you have a significant credit rating, with collateral. It is a rare occasion, when a bank will fund a new business for the desired full sum. Business loans are accessible, but usually to borrowers with a good personal credit history. A bank will generally not provide a loan facility to a new company; even should the company possess a financially guaranteed contract for a large order.
The terms “Angel investors” and “Venture capitalists” include astute businesswise investors, who are seeking opportunities to acquire shares in operations with high profit potential. They will provide a loan facility, usually, once-off payment, but only in return for a significant part of the business! Their expectation could include a high return from their investment and the imposing of conditions regarding the management and operation of the company.
Business Loan Pros
In a challenging economic climate the rate of unemployment has reached an exceptionally high level, which in many instances, has created adverse conditions for obtaining business loans. It is a climate that has seen various businesses forced into bankruptcy and others, just surviving. In certain instances, some small business owners are left with only one option to keep their doors open; a business loan!
With a carefully structured and efficient business loan, practically any sound based company, irrespective of its size, could produce an almost immediate growth factor. The proviso is that the borrowed finance is used constructively and with planned objectives. It should also be kept in mind that a business loan is taken for a variety of reasons, amongst which, are:
- A company may require secure finance to maintain its business operations
- Investment in new equipment
- Start a new product division.
This type of loan is not only an advantage designed for rapidly increasing businesses, as they are generally not difficult to obtain. This is due to there being a large number of potential lenders, willing to partner with a business owner who can offer an acceptable credit rating, a reliable income, and a well structured business plan. However, in many respects, the most significant “Pro” of entering into a business loan during an adverse economy, is for using this financial injection to increase working capital.
Those companies seeking the means to expand their operations usually have sufficient finance for their ambitions. Therefore, acquiring a business loan permits them to maintain their operating cash flow, enabling a situation that relieves the pressure, if confronted with any unexpected expenses. They accordingly are able to maintain comfortably, or increase, the repayments on their loan by utilizing the newly generated income from the expansion of the business.
Business Loans Cons
Flipping onto the other side of the business loans coin is that arguably, the most significant disadvantage for these types of loans is they are very difficult to obtain! An angel investor would be more inclined to approach a third-world start-up business, than one in the first world. They would also insist on the provision of actual proof regarding the future success of the business, even knowing that in most instances, it is not possible to obtain.
Another aspect to a business loan is that while a bank will offer a lower rate of interest, they counteract those lower charges by imposing higher accounting fees. By example; the simple action of depositing money into an account manually incurs charges for a business owner. Although some bank supported loans are eligible for tax benefits, in most cases however, debt in general is eligible for various forms of tax relief or benefits. It would be wise to seek advice from a tax attorney, regarding business loan tax relief options.
Business loans are recognized for their lengthy application procedures, which is more involved than those for a personal loan. A bank requires verifying each item entered on an application, after which, the borrower is assessed on eligibility for the loan. This is based on a points system that is adjusted as and when new information becomes available.
Preferences and collateral
It must be accepted that the general rule regarding a business loan application is that preference will be given by a finance provider, to business borrowers who have a long-standing account with the lender. Unless an applicant enjoys that status, they could discover a challenging situation that is full of obstacles. It is frequently found that the various requirements for a business loan application are generally difficult to obtain and can make for a frustrating experience.
In certain cases, a business loan will require the submission of collateral, with the underlying condition of a business loan being significantly easier to revoke and demand unexpected repayment. If a property mortgage, such as a home is offered, then the lender has the security of the house. They have the option to repossess the property and reclaim their money.
For anyone considering a business loan, it should be a question of carefully balancing the financial scales and then deciding whether the “Pros” or the “Cons,” are tilting them in your direction!