A business loan feels like the natural selection for startups seeking funding. It presents itself as a convenient financial product that provides you with the money required to kick things into action. By all means, business loans serve brilliant purposes and are excellent in many situations.
Nevertheless, it would be remiss to assume that this is the best funding option for every business at every stage of its life. In this article, we will look at the main pros and cons of business loans as funding options, so you can see if this method works for your specific situation.
Business Loans Pros
You will encounter plenty of benefits from business loans, particularly for companies just starting out or needing funding to get off the ground. As you move through these positive points you’ll soon understand when loans make more sense than other funding options.
A Straightforward Funding Process
Compared to other ways of generating money, loans are super straightforward. You find a lender, create an application, and then submit it. There’s no guarantee that you’ll receive the funding, but it’s a very accessible avenue to go down. As long as you have a great application with plenty of evidence to support your claims – and a winning business model – you shouldn’t face any issues acquiring money.
One huge advantage of business loans is the availability of industry-specific varieties. You have finance experts like LEONID providing loans specifically for government contractors. You may also come across lenders who strictly create loans for R&D businesses. The more you look around, the more varieties you see. This is great for business owners as it increases the chances of gaining funding if you can apply for loans that specifically target your industry.
Retain Full Control Of Your Business
Angel investors or venture capital firms are two examples of alternatives to business loans. Both have the benefit of giving an injection of cash, yet they also carry the same disadvantage. When other people invest in your business, they expect to gain something from it. This usually means they want a chunk of shares or a say in how you run the company. Loans don’t do this. You receive the money and retain full control of your business. Nobody expects a share of your profits, nor will you have someone looking over your shoulder telling you what to do. In many ways, this is what makes loans an attractive offer for lots of business owners. They appreciate the benefits of other funding methods, yet this is the main one that allows full control and ownership.
Business Loans Cons
All funding options have pros and cons, so it’s no surprise that loans may present drawbacks. Some could seem obvious while others are less known. We’ve done our best to single out the biggest disadvantages you could see when opting for a business loan.
Everything Must Be Paid Back
If you look at various business funding methods, many don’t require repayment. You can obtain funds from crowdfunding and will not be forced to pay everyone back what they invested. The core principle of a loan is that you’re borrowing money. Lenders give you what you need, but they’ll ask for it back. How do lenders make money doing this? By charging interest on the loan. Therefore, you’ll have to repay what you borrowed, plus a percentage extra as a fee.
Keep in mind that interest rates are extremely high at the moment, and you may be given a bad one based on your credit score. This can ramp up the costs of a loan, making it far more costly than you anticipated – and way more expensive than other funding models.
May Put Your Personal Finances At Risk
The majority of the time, business loans are unsecured. Nothing is used as collateral, but interest rates will be a lot higher. As such, companies can look into secured loans, which put your business assets as collateral to mitigate the risks. The problem with secured loans is that they can also affect your personal finances. If your business runs into financial problems and is unable to play, the nature of the loan could mean the lender is allowed to claim your personal funds or assets.
It’s very important to read all the small print or to ask a lender if your personal finances are part of the loan terms. Try to keep things separate or your business loan may have grave consequences for your personal finances.
Not Suitable For Multiple Situations
Lastly, a big con of loans is that they aren’t suitable for multiple situations. Startups can benefit from loans as they work beautifully if you’re funding a new project. Nobody knows about your business and you have no reputation, so a loan is usually the best option.
Conversely, what if you’re trying to grow your business? Loans can be viable, but when you’ve already got an audience, looking for investors or choosing crowdfunding can be more beneficial. You’re flying on the back of your popularity and using your customers or fans to help you grow. Likewise, you can’t use loans for ongoing expenses. If you need money to pay for equipment costs or to deal with cash flow issues, loans are never viable. In fact, many lenders won’t offer the funds for this because it’s an ongoing issue. Loans are traditionally used to fund projects and startups – that’s it. They won’t be the best choice if you have ongoing expenses and need some extra capital to cover them.
In conclusion, business loans are extremely good in some scenarios, but not as good in others. Generally, they are perfectly suited to small startups hoping to get off the ground. If you want a convenient and reliable funding method that allows full control over your business, this is the choice to make. In other situations, it could be better to review different business funding options and weigh up the pros and cons of them all before making your final decision.
Featured image provided by Alexander Grey; Unsplash; Thanks!