Everything that you should know about a Bank Loan
by Jessica Rodz CashFacts is Your Hope to QuickEvery business is dependent on its financial
investment for its growth. When a business is in its growing phase, it may
become difficult at times to feed it with the required capital because of the
financial constraint.
But, it is important to suffice your business
with the required finances to realize its full potential. These times may make
you explore different finance options to cater to your business needs.
Among all the available options, bank
borrowing is one of the common and preferred options. It is the traditional way
of financing your business and is popular since the existence of capitalism.
Along with the banks, there are many direct lenders and financial
institutions that offer loan facilities. These institutions also offer high
acceptance loans. Their loan facilities include short-term as well as long-term loans. Short-term loans may also include a £100 loan. These loans are available to
people with bad credit history as
well.
Bank borrowing may seem easy and beneficial,
but there are disadvantages too. Before borrowing a bank loan, it is essential
to know the pros and cons of bank borrowing.
This blog collates all the pros and cons of
bank borrowing to make you aware and informed:
Advantages
1.
Facilitate
Large Purchases
Asset building (large purchase) is an
important part of the business and becomes necessary at some point or the
other. A bank loan is a good way to finance your purchase, such as a vehicle, the property, or machinery.
Bank financing is beneficial for a business
set up as huge investment is required in the initial stage. Also, it helps in
the growth phase of a business with the initial setup when the expansion is
involved.
Without financing from the bank, some people
may become impossible to start their own business and be a successful
entrepreneur.
2.
Maintain
Ownership
Generally, when you plan to borrow from a
bank, there are no guidelines from the bank’s side to use the loan money
neither you are required to get into the nitty-gritty of your spending.
This proves to be one of the beneficial
points for bank borrowing. If you think
of borrowing from some external source other than the bank, there is some
influence for running your business in a certain way.
Also, borrowing up from sources other than
the bank may require giving up some part of your business in return of the
money being borrowed.
But in the case of bank borrowing, you do not
give up on anything in exchange for the money borrowed.
3.
Flexibility
There are many variables involved in bank
borrowing such as the loan term, the fee involved, interest rates, etc. These
factors may differ from bank to bank depending upon the location, loan amount, and the borrower.
Some of the factors are negotiable and can be
molded in your favor. The freedom to shop as per your requirements is one of
the key benefits of bank borrowing.
4.
Credit
Improvements
Long with giving a loan, you can improve your
credit in the process. Depending upon your debt situation, if you wish to
improve your credit score, you can work upon it while borrowing a bank loan.
Making a payment on time for your loan and
maintaining proper records will improve your credit score. If you make all the
payments on time without giving a miss and gap, it will improve your credit
score.
Disadvantages
1.
Risk
Foreclosure
In the case of bank borrowing, the bank may not
take up ownership of your business, but if you fail to make the bank's payment,
you risk your business foreclosure by the bank.
If you are unable to pay back the loan, you
increase the chances of foreclosure.
Mostly the loans are secured, i.e. they are
backed up by collateral or a mortgage. This is the case with the majority of
business loans. If you cannot pay back the loan, the bank will claim your asset
or the collateral.
In the case of extreme cases, when an entrepreneur becomes a defaulter, and large amounts are involved, the bank has
the right to take over your entire business.
2.
Guarantee
Secured
Another option on the loan is to secure it by
guarantee. If someone else has given security on your business loan in the form
of assets, then in case of default, someone else is being put at risk.
If the bank takes over your business, the
option is to liquidate or disband your business as a whole which can prove to
be disastrous for many entrepreneurs.
3.
High-Interest
Rates
One of the disadvantages of bank borrowing is
the high-interest rates involved. The interest rates may change because of the
variable interest rates.
The variability involved may make it
difficult for an individual to repay the loan. In case of a business downfall,
many banks tend to make their terms harder and unfavorable to follow.
4.
Risking
Credit Score
You may get a bank loan easily based on your
good credit score. But if you are unable to pay your bank loan on time, you may
put your good credit score at risk.
If you are borrowing a short-term loan, there
are high chances of risking your credit score. Long-term loans are a better
option as one missed payment can be corrected by making future payments on
time.
5.
Complicated
Application Process
Bank loans are an easy option, but the
process of applying may become a tedious task. The application process is
complicated and a lengthy one.
The bank secures every aspect before
lending money to an individual. It applies to every entrepreneur irrespective
of the business scale.
According to a survey, many small businesses
fail in their initial phase due to the lack of the required knowledge or the
right approach.
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Created on Mar 3rd 2021 04:07. Viewed 425 times.