Is taking a business loan a good idea? Advantages and risks you should know [new guide]

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Setting up your own business can be an interesting journey as an entrepreneur. For many, starting a personal business would offer them financial freedom and an opportunity to bring their ideas to life. As delightful as setting up a business may seem, there are certainly some risks and unforeseen danger that may come with it. For example, you may have to survive the first couple of months running at a loss before you turn in a profit.

However, one primary concern for starters, especially the ones with little or no investment capital, is whether or not taking a business loan to start their business is a good idea.  Well, taking a loan sounds like a dangerous idea, especially if you are uncertain about your business plan. And you may ask yourself, what if the business fails before I’m able to make a profit?

While naysayers may be quick to say no to this, it is essential to understand that there are several ways to source for investment funds, and non guarantee the success or downfall of your business.

Taking a business loan is just one of these ways, and it has its good and bad side like every other financing option.

However, before you decide to take a loan to start a business, you should learn more about what’s good and bad with loan financing. This article highlights the advantages and disadvantages of financing your business with a loan. First off, let’s begin with the benefits.

taking a business loan
Photo by Karolina Grabowska from Pexels

Advantages

1. The Profits Will Be All Yours

When it comes to financing with a loan, the trend is common with business owners who want to expand their business or push it in a new direction. This implies that they want to make the company more profitable. However, if financing is done from an investor, in this case, the expected return would be on any amount of money you make.

The performance of the business will be in direct proportion to how much they get in return. However that isn’t the case with loans; with a loan the returns are fixed, this means that you will pay the same amount back to the bank, regardless of how much profit you make

2. Bank loan a Convenient and Easy to Access

You can quickly get in contact with your bank and discuss with them the possibility of taking a business loan. Compared to other options for financing, a bank loan seems to be more convenient, and ease of access and can be considered as something that can be good for businesses.

Many business owners don’t have time to waste, and maybe impatient to wait for profits to grow so they can reinvest, as this usually takes a long time. Likewise looking for investors is also a process and can also take time.

You may ask; doesn’t it take time for the loan application to be analyzed and granted? Yes, it does, but they are easier to deal and cope with than the majority of the alternative options. And Of course, most times, it depends on your proposal.

3. Reasonable Interest Rates

Another advantage of taking a bank loan is the fact that they offer reasonable interest rates attached to most business loans. The banks are in a competition for customers with other banks, so they tend to offer a deal which is at least following what their competitors are offering.

However, this doesn’t mean the interest rates would be meagre, and banks wouldn’t seize the opportunity to make a healthy return on their profits. But the rates you get from banks are often better than most personal loan options. Also, the interest may often be tax-deductible in most cases, which means you get to pay in bits as you earn. But you may have to check with your local authority to confirm whether or not this is possible in the case for your business.

4. The banks do not influence how the money is spent

Unlike investors, a bank would never interfere with how your business is run. Finding an investor and initiating partnership implies you will have to work alongside them. And unless they are silent partners, or don’t know much about the business, they would likely co-decide how the company spends their money.

On the other hand, the banks care less about what you do with the money; their only concern is your being able to pay back with the added interest. What happens in the business is entirely up to you. So, if you want to have full control over your business, its growth and expansion, taking a business loan is usually the best option.

Disadvantages

1. Not All Businesses Will Qualify for a Loan

Financing institutions have a lot of strict rules, terms and conditions put in place when it comes to approving or rejecting applications for a business loan. And usually, not all business will meet the given criteria.

So to secure a loan, you will have to know how the banks analyze applications before writing your application. You won’t want to waste time on an application if it stands no chance of being accepted by a particular bank. In business, time is vital, and dealing with rejection can also be challenging to bounce back from.

2. They’re Often Secured Against Assets

Photo by Karolina Grabowska from Pexels

Bank loans are secured against an asset owned by the venture. Which makes it risky since the lender can seize the asset if you are unable to make the repayments on loan in due time. At first, you might think this wouldn’t be a problem, which might be right in your case, but many businesses have experienced lose for this sake.

So it only becomes a problem when your business doesn’t make as much profit as expected, and you’re unable to make those repayments on time. Therefore, you should put this into consideration before taking a business loan, and make sure you are confident in your business idea. Or better still, have a backup plan to fall back on, so you avoid losing an asset.

3. You Might Not be Granted All of the Money You Requested

Some banks would only grant some of the money you requested for, in response to the loan application. After scrutinizing your loan application, they might think that a business doesn’t as much as you are soliciting to lend, or they are quite uncertain about your business plan but are interested in your asset.

This isn’t an uncommon response for banks, and it can be frustrating for business owners, because most of them have made plans on that amount, and may have to re-strategize to cut costs on their budget.

Conclusion

You need to make sure that you are always cautious when it comes to borrowing money for your business. Taking a business loan can be a great solution for companies that don’t want to function with investor or business partners. And those already established businesses that are just looking to expand and make more profit.

However, ensuring that you are capable of paying back the amount that you borrow is essential for your business. Don’t forget your assets would be at stake, and could be taken from you as collateral if can’t make repayments in due time.

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