Advantages & Disadvantages of a Bank Loan
Bank loans have become an essential part of businesses. In order to increase the growth and expand the business and also cover the overhead cost every enterprise need fund, for that purpose, lending and borrowing have become seemingly common in every business.
There are various types of loans that are available to meet individuals’ financial needs. Bank loan benefit is that they are also a reliable method of financing a small business.
Business owners should weigh the advantages and disadvantages of bank loans against other means of finance. They should examine whether the loan is good or bad.
Advantages of bank loan
- Flexibility:- A loan allows one to repay as per convenience as long as the installments are regular and timely.Unlike an overdraft where all the credit is deducted in a go, or a credit card where the maximum limit can not be utilized in one go.
- Tax benefit:- Interest payable on the loan is made by the government tax deductible item when the loan has been taken for business purposes.
- Cost effectiveness:-When it comes to interest rates, bank loans are usually the cheapest option compared to overdraft and credit cards.
- Profit retention:- The profit raised in the bank loan need not share with the bank while when you raise funds through equity you have to share profits with shareholders.
Disadvantages of home loan:-
- Hard prerequisite:- Since big finance from a bank is based on collateral, most young businesses will find it hard to finance their operations based on a bank loan.
- Security needs and creditworthiness:- In order to avail of a bank loan you should have a sound credit score or valuable asset otherwise it is extremely difficult to obtain a loan. Also, banks are incredibly vigilant to lend money, they only give loans to borrowers who have the ability and willingness to repay the loan.
- Strict repayment schedule:- Banks prescribe a very strict repayment schedule to the borrower, which must be adhered to. Failure to do so may affect borrowers’ future credibility and credit score.
- Processing charges:- For sanctioning a loan, most banks charge a processing fee which adds to the cost of your loan. This is normally charged in the terms of a percentage. The higher the loan amount, the bigger the percentage of the processing fee is.
- Strict eligibility criteria:- Another disadvantage is that banks are very cautious about lending loans to small businesses and start-ups. Their strict lending criteria can make it particularly difficult for start-ups and newer businesses to be accepted for a loan as they don’t have the financial or trading history to back up their application and if they are accepted the interest rates are likely to be increased to compensate for the added risk.
To conclude, bank loans are available to finance the purchase of inventory and equipment and operating capital and funds for the growth and expansion of business. These loans are a reliable way of financing a small business, but banks often only finance firms with substantial collateral and a long track record. On the other hand, their terms are incredibly strict. Business owners should examine carefully the advantages and disadvantages of bank loans in comparison to other means of finance.