According to insights, 29% of business failures are due to a lack of sufficient capital. This is also the second most common reason businesses go under.
If your business needs a capital injection, getting a business loan can be a good solution. Business loans hold a number of advantages over other methods of raising capital.
However, business loans also pose a few disadvantages.
Before you apply for a loan for your business from a bank or other lending institution, it is crucial that you understand the pros and cons of business loans.
What are the advantages and disadvantages of a business loan? Keep reading to find out. Once you understand the benefits of business loans, as well as their drawbacks, you will be able to decide whether taking out a small business loan is the right move for you.
1. Bank Loans Have Reasonable Interest Rates
One of the primary advantages of taking out a small business loan is that they typically have reasonable rates of interest.
Business loans from banks and other traditional lenders generally attract interest rates of between 4% and 13%.
The interest rate you end up getting will depend on a number of factors, such as your credit score or your business’s credit score (depending on your business type), the nature of your business, your CIBIL score, your annual turnover, and your repayment history.
However, it is safe to say that taking out a business will attract a lower rate of interest than options, such as lines of credit.
2. Bank Loans Can Be Quick
Another perk of business bank loans is the application process is relatively quick. If you are approved for the loan amount, you could have access to it in 7 to 15 working days.
Take note, however, this is not always the case. In rare instances, business owners can wait more than 6 months for approval.
That said, 9 times out of 10, business loans are a faster way to leverage capital than other methods, such as looking for investors.
3. Banks Do Not Have a Say in How the Money Is Used
One of the primary benefits of taking out a small business loan is that the bank does not dictate how you use the loan once it is in your hands. This allows you to be flexible and respond to market conditions without having to consult anyone.
Contrastingly, if you bring on an investor, they will most likely want to be consulted about decisions and have a say in the running of your business. For many business owners, this is not desirable.
If you wish to retain full control over your business, a traditional business loan can provide this.
4. Any Profits Generated by the Loan Are All Yours
Another advantage of taking out a business loan instead of looking for investment is that not only do you retain full control over your business, but you get to retain all the profits as well.
The reason business owners need capital injections is usually to grow their business or turn it profitable. If you bring an investor on board, they will expect a share in the profits.
Business loans, on the other hand, do not have this drawback. All you are required to do is pay the loan and its interest back in the given time period. What’s more, business loans are able to turn profits for many businesses, with studies showing that a single loan caused 61% of businesses to turn profitable.
5. It Can Be Tough to Qualify for Bank Loans
One of the drawbacks of business loans is that they can be hard to qualify for.
According to lending indexes, big banks only approved 27.5% of business loans in 2018, and small banks approved 49.8%. Alternative lenders have slightly higher approval rates of 57.2%.
Some of the reasons why a bank would reject your loan application include:
- Your credit score
- Your business’s credit score
- Too short a time in business (a frustrating one for those wanting to take out a business loan to start a business)
- High levels of debt utilization
- A risky industry type (such as mining)
- Lack of sufficient collateral
If one or more of these factors are present, you may be faced with having to apply to multiple banks/lenders and possibly end up with higher rates of interest.
However, reports are currently stating that big bank’s approval rates of small business loans are climbing dramatically. Therefore, in this climate, you may face fewer approval hurdles.
6. You Might Not Be Able to Borrow the Amount You Need
Another downside to taking out a small business loan is that banks will sometimes approve your loan, but not for the amount you need. They might deduce that you do not need the amount you have applied for.
This can be incredibly frustrating, as it may limit your capacity for growth and can impact what you were planning to do with the capital.
7. Bank Loans Can Trigger a Cycle of Business Debt
The biggest disadvantage to business loans is, if not managed correctly, they can spark off a cycle of debt where being in debt causes you to take out more loans until you can’t keep up with the payments.
Sometimes, this can happen despite best efforts on your behalf to manage your new capital wisely. Market conditions and other factors beyond your control could impact the ability of your business to turn profitable on the loan.
Fortunately, if scenarios out of your control do take place, there are ways to restructure your debt so that it is manageable for your business. Some of these options include debt consolidation.
What Are the Advantages and Disadvantages of a Business Loan? Now You Know
If you were wondering what are the advantages and disadvantages of a business loan, you now know.
Business loans can be the boost that your business needs or they can turn into the debt battle you need to beat.
Are you struggling with business loans that have gotten out of hand? If so, we recommend you take a look at our consolidation solution matching tool. This will instantly pair you with the best offerings from our network of approved providers, based on your personal needs.
Try it today and skip the legwork of tracking down the best consolidation solutions. Don’t hesitate to contact us if you have any questions. We will be happy to help.
