Bank loans are used for many different reasons. They are available for financing the purchase of equipment and inventory but also for obtaining operating capital and funds that will help the business to grow and expand.
These can be very reliable ways of financing a job and these loans are time-honoured. However, banks tend to only finance companies with a long and steady track record as well as substantial collateral. So, this method of financing a business may not be for everyone. It mostly depends on your business. That is why, if you are thinking about applying for a bank loan, you first need to consider the next following advantages and disadvantages of bank loans.
Advantages of Bank Loans
- Bank loans can be a very steady and reliable option to business owners who want to push their company forward and help it expand. Among many other things, bank loans are great due to the fact that you get to keep control of the company, the loan is temporary, and the interest tax is deductible. Further, If you have a personal account in Bank and want to protect bank account from Hacker. Just follow these steps to protect your bank account.
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Advantage #1: You can Keep Control of the Company
This is essentially how a bank loans money to the business. It evaluates the value of the business and they estimate your company’s ability to service the loan by delivering the payments in full and on time. The difference between bank loans and equity finance is that the bank does not take away your ownership of the business. In addition to that, banks do not get involved in any parts of you running your business where the bank has granted a loan. In other words, you get to keep the full control of your own business and how it operates, even the parts of it that are covered by the bank loan.
Advantage #2: Bank Loan is Temporary
Another great advantage of bank loans is that the loan is temporary. Once you pay off the entire loan you have been granted by the bank, you no longer have any obligation or responsibilities towards the bank lender unless you decide to take out a subsequent loan. Compared to equity finance, where the company might end up having to pay out dividends to shareholders as long as the company exists, a bank loan seems like a much better option.
Advantage #3: Interest is Tax Deductible
Lastly and most importantly business loans taken from the bank are tax-deductible. In addition to that, if you take a fixed-rate loan the interest rate will be the same throughout the entire course of your loan and loan servicing payments will stay the same as well. In other words, it will be a lot easier for you to budget and plan for the monthly loan payments you need to make. Even if you take an adjustable rate loan, you can simply use a spreadsheet and compute your future payments if the change in rates occurs.
Disadvantages of Bank Loans
The fact that you as a business owner get to keep full control of your business during the loan is definitely one of the best advantages of bank loans. Deductible taxes and temporariness of the loan are great bonuses too. However, there are a couple of disadvantages that you also need to keep in mind. They may not be as big of a problem to some people but they should still be mentioned and discussed.
Disadvantage #1: Tough to Qualify
Firstly, what seems to be the biggest disadvantage of taking a bank loan is the fact that it’s tough to qualify for it. Unless your small business possesses a collateral value or substantial track record, it will be very challenging for you to obtain the bank loan. Banks are very strict about who they lend the money to. They lend to businesses who can guarantee to pay back their loans and cover the unexpected losses if it comes to it.
Disadvantage #2: High Interest Rates
Lastly, bank loans come with very high interest rates for small businesses while the amount of bank loan a small business can qualify for is often not sufficient enough to meet the needs of a small business. On top of that, these high interest rates tend to expand since the business has both the loan payment to take care of and all the additional funding to cover which is not provided by the bank. In that case, if you have a small business, it’s better to turn to some more reliable alternative loan options.
In conclusion, bank loans can be a great option for expanding the business. They do come with several great options and only two disadvantages. Whether you will take this kind of loan or not largely depends on what kind of a business you run. If you own a small business that doesn’t have a substantial track record, then maybe opt for some other alternative loan options. However, if you have a bigger and already established business and you want to expand its success, a bank loan is a perfect option for you.