When a business needs cash, the idea of a business loan may come up. Businesses may need funds for growing their business, improving their business, paying off debt or even purchasing equipment that they may need. There are term loans, line of credit, invoice factoring, and many others that are made for these very reasons. But no matter what the reason or type of loan you may want or need, it is imperative to realize there are pros and cons to taking on debt for your business. Below we explore some reasons you may want to or not to consider a business loan.
Taking out a loan may seem like a good idea for many reasons. One thing that is important to consider is that by taking out a loan and not seeking partners in your business or additional investors who may ask for ownership in your business, the lender does not have a say in your business operations or even how you manage your business’ funds. You still can keep your business running like you want, it allows you to keep the integrity of the business. Since they aren’t technically partners, they are not entitled to your profits either. They just care about the repayment of the debt you have borrowed from them. Another thing to consider are costs. It may be daunting to take on more debt, but loans typically have lower interest rates in comparison to other forms of debt like credit cards and other funding sources. While we are on the topic of interest rate, a big pro with small business loans is that the interest paid towards them are tax deductible. This savings can add up quickly and may be one of the best advantages. Business loans also offer potential large sums of money quickly and build credit ratings to help secure future loans. This helps the financial health of your business.
Don’t let the positives about getting a business loan fool you. There are also some cons to using this form of debt. For starters, to get a loan can be burdensome and hard. Since the guidelines can be strict and require a lot of information, startups can have a difficult time establishing the credit to get a loan. They may need information about your business structure, investors profit and loss predictions, etc. When a business is new, it may be difficult to prove the information that they are asking for. Because a lender is taking on the risk of giving a loan out to a smaller business, the rates may be higher. Another downfall of a business loan is that lenders may ask for you to provide collateral like a house, property or stocks. This means the lender will reclaim the collateral if you are unable to pay off the debt or make timely payments. Loans belong to the bank or lender so they are shown as a liability on the business’ balance sheet. This affects the valuation of your business.
There are pros to every business decision you make so it is smart to evaluate them prior to deciding.