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Fund your Small Business with the Right Loan

Starting up a business is not an easy task. Various things are required for a business setup, such as Proper infrastructure, finance, workforce etc. All start-ups need one common thing and, i.e. funding.

Having spare money for business expansion and a large number of workforces is the ideal situation. But in reality, it is difficult to have spare money.

Most businesses dream of having spare funding for their business expansion and other functions. In case of having inadequate funds, these small businesses turn up to external sources and seek financial help.

Every business requires a different type of funding depending upon the nature, size and function of the business.

For most businesses, external funding is a common go-to option, and business loans are the best choice for entrepreneurs.

Business loans are categorized according to the size and need of the business. Business loans include long-term loans and short-term loans, ranging from 1-20 years.

These loans are also known as doorstep loans and are offered by traditional banks, private lenders, and financial institutions.

Business Loans are available to fulfil different business needs, such as renovating the premises, purchasing stock, catering to start-up costs, buying new machinery, and many other expenses.

Before borrowing a business loan, it is essential to gather complete information about the lenders/ banks and the type of loan you offer.

To help you with your loans needs, this blog states the advantages and disadvantages of borrowing a business loan:

Advantages

Facilitates business growth

Bank loans are the best way to finance your business and watch your business grow. This is an external source to fund your business that you can utilize in your business without waiting for the funds generated by your business revenue.

To expand and grow your business, it is essential to follow a practical approach and borrowing a bank loan is a part of this approach.

Although the time duration may differ from time to time and it may take time to receive your funds, it will be worth it for your business. In comparison to other funding sources, this is a practical way to fund your business.

You can control the funding

These bank loans come with control and can be used accordingly. Suppose you have borrowed a certain amount from the bank or any other financial institution. In that case, you can inject money into your business as per your needs without hampering your other business functions.

If you wait for other funding options such as equity finance or any other option, you first have to share it with the investors, and the leftover can be used for other business functions.

It is easy to pay, i.e. once you pay back the total amount to the lender, you are under no obligation towards the lender or any other authority.

No interference

One of the most significant advantages of a bank loan is that there is no interference from the bank side once you have received the funding. The banks are just concerned with the repayment on time, and once it’s done, the deal is done.

Favourable interest rates

If you borrow a bank loan, there are high chances of getting a favourable interest rate than the private lenders. In this case, you can also opt for a long term loan as it will be beneficial for your small business.

To get a favourable interest rate, you should maintain a good credit score as it plays an essential role in getting the right kind of loan for you.  Having a good credit score increases the chances of quick approval and favourable interest rates.

Disadvantages

Strict criteria for loan eligibility

Along with all the benefits of a bank loan, there are few disadvantages too attached to it. Since banks are official financial institutions, they have strict eligibility criteria for small businesses.

It may be difficult for you to borrow a loan from the bank due to the small size of your business. The reason behind these criteria is the non-availability of trading history for small businesses.

They do not have any financial history to show as proof. Hence, trust issues are there. Without any financial history, there are high chances of interest rates being high to compensate for the added risk of financing a small business.  

Tedious application process

Applying for a bank loan can be lengthy and time-consuming. Along with the loan process application, several other forms need to be filled by the small business owner to prove his authenticities, such as a business plan, account history and many other financials.

In the case of the large loan amount, the process becomes complex and lengthier.

Inadvisable for current expenses

The bank loan that you borrow is not recommended for the ongoing expenses of your business. Banks will be offering money to the business that can repay in the given period.

So they would want you to invest your own money in the ongoing activities to prove your credibility. If you are looking for finance to cater to your ongoing expenses, you can consider other options such as credit cards, overdrafts or capital loans.

  • The risk factor

In the case of a bank loan, there may be no other risk risks attached to the loans except on, i.e. in case of non-payment of the loans, you might need to sell off your assets to pay back the loan.

You need to remind yourself o putting your small business at risk. Every company borrows money to make the payment. Still, if your business doesn’t generate the required revenue, it will be difficult for your business to pay back the loan leading to unfavourable consequences.

Before applying for a loan, it is beneficial to ensure that your assets remain safe in non-payment and have an alternative option for your bank loan payment.

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