Usually, entrepreneurs invest substantial capital while starting up a business. Do you think it is enough to keep the business running? Of course, not. At some point in time, companies need money to purchase assets and expand the business. After all, the profits of small businesses aren’t enough to make up for considerable purchases. Thus, they start exploring the option of external financing.
Believe it or not, when talking about financing, loans are the first option to hit the mind. Alongside being super convenient, it offers acceptable interest rates too. However, nothing comes without some drawbacks. So, before making your mind look at both sides of the story. Below are five pros and cons of business loans for small businesses.
PROS OF SMALL BUSINESS LOANS
Even though taking debt is risky, business loans have become very popular for the benefits it is providing. Have a look below.
1. Feasible Payment Terms
Small business owners are hesitant when it comes to acquiring loans because of overwhelming interest rates and repayment schedules. Well, this is not how business loans work. They offer comparatively low-interest rates than other options available. Similarly, they give you the flexibility to decide your repayment schedules, either monthly or fortnightly. Even though you have the option to choose the repayment time, it is preferable to keep as short as possible for lower interest rates.
2. Variety of Options Available
Usually, owners are unaware of the options available to them. You might have made your mind for a traditional loan, but it is not a bad idea to explore other options. After all, you never know what complements the nature of your business. Thus, look for a line of credit, merchant cash advance, and inventory financing interest rates to see which is the most suitable choice. Besides, it allows you to compare options to bag the best opportunity available.
3. The Benefit of Tax Deductions
Small businesses have to cast away a chunk of their profits in tax, and no one likes sharing profits. Well, business loans can help you save some profits from taxes because you have permission to write off interest expenses against loans. Besides, you can also deduct this amount from tax liability. Your financial statements would show low profits due to which lower tax rates would be charged. Thus, if you know how to work with taxes, business loans can help you save a few pennies.
4. Overcome Cashflow Problems
Every business has the aim of profit maximization and growth due to which some businesses increase dependency on credit sales. They fail to realize the consequences of making sales entirely on credit terms. Customers take months to pay back, which can leave you cashless. How would you foot bills for day to day expenses? Well, these business loans can come to your rescue. The quick application process and fast approval can lend you some bucks in no time, helping you overcome negative cashflows.
5. Quick Approvals
Honestly, the majority of small businesses are in a hurry at the time of acquiring loans because the lack of funds is halting their business practices. Surprisingly, business loans offer quick approvals, especially if you have a strong credit score. You have to fill in all the requirements, provide all the documents, and your business license. If everything is complete, you can get an approval within 24 hours. Besides, to promote feasibility, the application forms are also available online 24/7.
CONS OF SMALL BUSINESS LOANS
At the moment, business loans seem like the perfect option available, but you can’t decide without looking at the other side of the picture. So, look below to see some of the drawbacks of business loans.
1. High-Interests & Credit Score
Although you have a small company, you are operating in a business world where giants have the edge over small businesses. All those companies that have a reputable image and established name can gain the bank’s preference and lower interest rates. Thus, making it hard for small companies to make their way in the competition. Similarly, without a strong credit score – 700, it is challenging to bag a loan, especially with low-interest rates. However, paying high interest is out of the question.
2. No Guaranteed Approval
Usually, small business owners have insufficient funds to buckle up an expense due to which they seek out for a loan. Unfortunately, there is no guarantee of loan approvals for the amount you require. At times, you might get 70% of the entire amount you applied for. Thus, you still won’t have enough money available to purchase an asset while a loan on your shoulders with the responsibility of repayments. So, things don’t go the way you planned.
3. Cut-Backs on Profits
Every business has an overwhelmingly long list of expenses, not enough space to add another interest expense to it. Believe it or not, even if the interest rate is as low as 5% to 8%, it does make up a huge expense on your profit and loss statement. Thus, resulting in decreased profits. If you fail to pay interest on time, then it would also add to the list of liabilities in your balance sheet.
4. Lengthy Application Process & Paperwork
Indeed, approvals are quick, but you have to go through heaps of paperwork. Financial institutions have to verify all your credentials to close doors for potential defaults. You have to submit your updated, current, and future projected financial statements with cashflows. Alongside this, your business licenses, credit score, personal details, and even collateral. All this paperwork is quite time-consuming and requires a couple of weeks.
5. Substantial Risk Attached
Usually, banks ask for collateral if you are opting for a secured business loan. You need to keep your house or any property as a security with the lender. In case of failure to repay, they would cover their losses by selling the collateral. Thus, by opting for this option, you are welcoming loads of risk because you never know how the business performs in the coming years. After all, economic factors are out of control. However, your unwillingness to set collateral would get you higher interest rates, which are again a big risk.
Although business loans are becoming popular and providing small businesses with every potential benefit, it is important to research well. Sometimes, businesses ignore the drawbacks attached to loans, leading to financial constraints in the future. So, before calling the shots, look above to see the pros and cons of business loans for small companies.