The Advantages and Disadvantages of Bank Loans for Small Businesses

In the past couple of decades, small and medium-sized enterprises are encouraged as they have proved to play a vital role in the overall economy of the states globally. According to a report, small and medium-sized businesses have a turnover of more than 25 million British pounds comprising gross assets of around 12.5 million British pounds. Therefore, it is safe to say that the scope of setting up small startups is pretty great. 

If you are planning to start your own small business, then you are probably struggling to manage the finances and looking for your options. Many banks are offering loans to small businesses even in the times of COVID’19; different banks are ready to help. 

However, you need to have proper information before you apply for a loan for your startup. For example, different banks have different criteria that you and your guarantor need to meet. 

In this blog, you’ll find both advantages and disadvantages of getting a loan from the bank if you are a small business. 

Advantages of Taking Loan from the Bank 

If you are looking for a loan for your small business or startup, then here are the pros of getting this loss from the bank:

1. Complete Control over Your Business 

Getting a loan from anywhere except banks can come with a lot of restrictions. Being an entrepreneur, you would obviously want to run your business on your conditions. Therefore, it is perhaps the most important benefit of getting a loan from the bank because they don’t impose any restrictions on your business and don’t try to share control of your business with you. 

However, with the growing trend of online loans, people are getting more comfortable opting for loan options other than banks.  

2. Provides A Way for Growth of Your Business 

Getting a loan from a bank for your startup is a convenient way to start expanding your business. This way, you don’t have to wait to generate enough money to start new ventures or for the growth of your business. Simply put, with the help of a bank loan, you can make future plans about your business without worrying about the money. 

3. You’ll Get Favorable Interest Rates 

The first question that comes into your mind is how much the interest rate will be? You may also think, what will happen if the circumstance change and you don’t have the money to pay the interest? Well, the good news is that you can have pretty favorable interest rates when it comes to taking loans from the bank for your small business. 

4. Banks May offer Extra Services 

Another advantage of getting a loan from the bank is that there is a chance that you may get extra services. For example, if you already have an account in the bank, they may offer you expert business advice based on their knowledge of your business. 

5. Interest is Tax-deductible 

More often than not, bank loans are tax-deductible. It is good news for small businesses as you don’t have to worry about changes in interest rates throughout the interest payments.

Disadvantages of Taking Loan from the Bank 

Well, when it comes to bank loans for small businesses, everything is not as great as it may seem. Here are some of the disadvantages that you must know about: 

1. Very Strict Eligibility Criteria 

As appealing, the idea of getting the loan from the bank for your small business may sound; it is mostly not very practical. It is because the eligibility criteria for lending loans to small businesses is very tough. Therefore, there is always a chance that you may not get the loan even after waiting for a long time in the line. So, you need to keep your other options open just in case you don’t get a loan from the bank.  Another option for you might be taking an online loan with no requirements from registered lenders.

2. Lengthy and Difficult Application Process 

Applying for a bank loan for your business is not an easy thing to do. Not only you’ll have to fill out lengthy application forms, but you’ll also have to provide the bank with a detailed business plan. The bank will also ask for your financial records and trading history. 

3. You May Not Get What You Need 

Before you fill-up the amount of loan on your application, you need to know that more often than not, you don’t get the amount you’ve applied for. So, if you have made plans about what you are going to do with the money, then you may have to hold them and wait for the actual amount that you may get from the bank. 

4. Bank Loans Come At a Price 

Banks don’t lend money without the security, and secured loans carry their own risks. Clearly, you are getting the loan with the intention of paying it back. However, when it comes to businesses and especially startup businesses, many things can go south, and you may end up in loss. In such situations, the assets that you’ve put up as security could be in danger. In the worst-case scenario, you may end up losing them. 

5. Banks Don’t Prefer Start-ups to Lend money 

Lastly, you need to know that even after you’ll do everything right, you may not get the money from the bank. The reason is pretty simple; banks don’t prefer to lend money to small businesses. It means that if they have an application for a loan from a running business and an application form a startup, the bank will pick the running business to give the loan in the blink of an eye. 

Conclusion 

Starting your own business is a dream, and of course, you want to do everything right to make your business a success. So, make sure that when you decide to get a loan, you know what your options are and what type of business will suit your business the best. All types of loans have their pros and cons, but you need to do the math yourself and decide if the pros of getting the loan form the bank outweighs the cons.