Advantages and Disadvantages of Applying for a Business Loan
If you are a business owner, then you would be aware of the adage, ‘to make money, you must have to spend money.’ For your business to grow, you must increase your capital from time to time; you must invest in adopting new technology, hiring new skilled staff, marketing, etc. However, it is also true that you cannot invest until you grow your business.
So, the answer to this perpetual dilemma lies in taking a business loan. Whether you own a start-up company or a well-established organisation, business loans let you get access to funds you may need to meet various business-related expenses. It could be for buying raw materials, paying staff salaries, getting new machinery, etc.
Like any form of credit, business loans, too, are like a double-edged sword, it has both pros and cons, which are discussed below.
Advantages of a business loan
Flexibility of fund usage
When you apply for a business loan, the lenders do not interfere in how you utilise the amount; they are only concerned about timely repayment. Therefore, business loans let you be in full control of how you spend the money and business operations.
Getting a business loan is easy
Applying for business loans is easy, especially as lenders nowadays offer online services. You can approach any lender of your choice, compare their loan offering, discuss with the loan officer (if needed) and get the funds you need.
Get loans at competitive interest rate
Today, with the growing competition among lenders, you can get business loans at competitive interest rates. The lenders, in their bid to attract new customers, also offer tailor-made loans with flexible repayment options, minimum prepayment and processing fees, etc.
No interference in business operations or profit sharing
One of the most significant advantages of a business loan is that, unlike getting equity investors, you need not share your business profits with others. Here you borrow a fixed sum and repay it with interest to the lender within a specific duration.
No security or collateral needed
No matter the type of business you own, you can easily find a lender willing to offer you a business loan without any collateral or security. However, you must meet the lender-specific eligibility requirements. Since business loans are an unsecured form of credit, it is an excellent option for small business owners to get the desired funds for their business operations.
Improves business credit score
Another significant benefit of availing business loans is that it helps you improve your creditworthiness and credit score, provided you repay the EMIs on time. If you maintain a high credit score and good repayment history, then you can get more finances at a lower interest rate in the future.
The interest you repay on a business loan is tax deductible under Indian Income Tax Laws. Thus, getting a business loan also helps you reduce your overall annual tax liability.
Disadvantages of business loan
A business loan may tie up cash that you can use for other business purposes. Your business may be prospering, but the monthly EMI payments may restrict you from buying new equipment that could fasten the production process or hiring a new employee. Thus, business loans may disrupt the business's cash flow. You can get additional financing, but it would increase your debt obligation.
Reputation at stake
As mentioned earlier, applying and getting a business loan is easy. But you must be able to repay the borrowed amount on time. If you fail to repay, then your business reputation will be at risk. In the current competitive market, where business reputation precedes the products or services offered, non-payment can have a significant impact.
One of the disadvantages of a business loan is that you may have to adhere to strict regulations during the course of repaying the amount. For example, some lenders may require you to maintain a specific debt-to-equity ratio, which can be detrimental to your business growth. If the debt levels become too high compared to your equity, then the lender may demand immediate repayment or increase the interest rate.
Although the business loan application process may vary from one lender to another, dealing with the lenders can be overwhelming, especially if you are a first-time borrower. You may have to comply with tedious paperwork; the lender may ask you to submit documents relating to your business to assess your personal and business risk and credit profile.
Based on the assessment of your business's financial profile, the lender may determine your eligibility. This means you may not get the amount you desire, which, in turn, may hamper your business.
Now that you are aware of the advantages and disadvantages of loans, you know that the pros of business loans definitely outdo the cons. So, apply for a business loan, and take your business to the next level.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.