Bank loans are an option for acquiring operating capital, money for business expansion, and financing the purchase of inventory and equipment. These loans are a tried-and-true source of funding for small businesses, but banks frequently only work with companies that have strong collateral and a proven track record, and the terms they give are frequently very severe. Business owners should compare the benefits and drawbacks of bank loans to alternative sources of funding. You can find more info here.
Advantages:
Maintain Command of the Business
A bank will lend money to a company if it believes the business will be able to repay the loan with timely and full payments. Banks do not acquire any ownership stake in enterprises, in contrast to equity financing, where the business issues shares. Additionally, bank employees are not involved in any part of managing a company to which they have provided a loan. This implies there will be no outside interference and you will maintain complete management and control of your company.
Bank Loan is Short-Term
Unless the business borrower wants to take out another loan, there is no longer any responsibility to or interaction with the bank lender once a loan has been repaid. By contrast, in equity financing, the corporation may pay dividends to shareholders for the duration of the business.
Tax Deductions for Interest
Tax deductions are available for business bank loans’ interest. In addition, loan servicing payments stay the same for the duration of the loan, particularly with fixed-rate loans where the interest rate is fixed for the period of the loan. Because of this, it is simple for firms to plan their budgets and make monthly loan payments. Even if the loan has an adjustable rate, business owners can use a straightforward spreadsheet to estimate future payments in case interest rates fluctuate.
Disadvantages:
Not Easy to Qualify
Bank loans have one of the biggest drawbacks in that they are very hard to get unless a small business has a strong track record or expensive collateral like real estate. Banks take care to only lend to companies that can clearly pay back their loans and to ensure that they have the financial reserves to sustain losses in the case of failure.
Exorbitant Interest Rates
The interest rates on bank loans for small businesses can be fairly high, and the amount of bank funding that a business is eligible for is sometimes insufficient to fully satisfy its needs.
