borrowing

Advantages & Disadvantages of Borrowing Money from the Bank

While your business is on a growing stage, you may need capital for investments and future business plans. At the time, you may not have the required capital to put into your business.

Every business needs regular investment from time to time to grow to its full potential. There may be certain avenues that you want to explore and find growth opportunities. In such a case, borrowing is the only way out.

The benefit of borrowing

Many times, a business needs money for its smooth functioning. You may have different options to explore, but borrowing from the bank comes as one of the easiest options. But this borrowing comes with two sides.

Before borrowing from the bank, it is your responsibility to research and gather all the information relating to the loan.

Advantages of borrowing from banks

 

  1. You can make large Purchases

Every business needs assets to function, and some assets may be expensive while some may be affordable. But every asset is of importance to the business sooner or later.

Borrowing from the bank in the form of a bank loan can be a saviour to you to purchase all the assets irrespective of their costs.

You can purchase assets such as property, business vehicles, machines etc. For many businesses, it would be not easy to purchase these assets. Hence, banks offer benefits too on loans to motivate entrepreneurs to borrow these loans.

 

  1. The ownership in the business is maintained

When you borrow a loan from a bank, there are no instructions on how to use the money. If you borrow from a non-banking financial institution, you have certain pressure and influence to use the money in a specific way.

In other cases, you may have to give up some share of ownership to obtain the funds. Borrowing from the bank does not involve such clauses. You do not lose your business ownership upon borrowing from the bank, and you are free to use the money in any form of business development.

 

  1. Involves flexibility

Several variables are involved in a bank loan, such as the loan term, the loan fees, the application requirements, interest rates etc. All these factors are negotiable and differ from bank to bank.

You can choose whichever bank is suitable for you for these factors and help your business grow. If you do proper research, you can get a good deal with the bank for your business growth.

 

  1. Credit Improvements

If you wish to improve your credit score, one of the benefits of borrowing money from the bank is that it helps to increase your credit score. It also depends on your debt situation.

If you make all the payments on time, this timely payment will help you maintain a good credit score. If you pay without missing any of your payments, it will improve your credit score eventually.

Disadvantages

 

  1. Nonpayment leads to foreclosure

Even if you borrow a loan from the bank, the bank is not responsible for your business if it shuts down. In the case of repayment, you risk your business for a foreclosure.

Most of the loans offered by the banks are secured, i.e. backed up by an asset or any security. It is a form of collateral pledged by the business to the bank in return for the loan.

In case of nonpayment, the bank can claim your asset that was mortgaged. In extreme cases, banks can claim your entire business if you fail to repay the loan.

 

  1. Guarantee Secured

If you have borrowed the loan for your business and a guarantee secures it, then someone else has pledged their asset or any security in return for your loans. If you fail to repay the loan, you will be putting someone else’s assets or security at risk.

 

  1. The interest rates are higher

The interest rates of the banks are usually higher than the market rates, especially if you have chosen a loan on variable interest rates. They can go up over time and make it expensive for you to repay the loan.

Along with the interest rates, the loan terms can also change over time. When businesses are going through tough times or failures, many banks are known for their unfavourable terms.

 

  1. It may decrease your credit

Your credit history is very important irrespective of the institution that you borrow money from. When you decide to borrow from the bank, the bank checks your credit history and then decides your loan terms.

If you are considering other sources of funding for your business, you do not need to worry. Others sources include equity financing.

In case of having a good credit rating, you can expect favourable terms for your loan borrowing. On the contrary, if you have bad credit, it will make it difficult for you and attract unfavourable terms for your loan borrowing.

 

  1. Putting your credit score at risk

If you maintain a good credit score and decide to borrow money from the bank, upon nonpayment of your loan, you risk your credit score. There may be a situation when you are not able to pay back the loan. In this case, your credit score goes for a toss.

It also depends on the loan term. For example, if you have opted for a short term loan, one missed payment can make it bad for you by lowering your credit score, whereas if you are borrowing long term loans, then one missed payment can be rectified by making the future payments on time.

In short term loans, you have to be careful as a missed payment will lead to a bad score that will eventually affect your next loan application.

 

Conclusion

A bank loan application can be complicated and time-consuming as these banks are thorough and comprehensive in their procedures. A bank safeguards it from all sides before lending loan money to you. They become more careful when a small business applies for a loan from a bank.

The statistics clearly show that many small businesses tend to fail initially, which makes the banks hesitant in lending loans to small businesses. Before providing the amount, the bank asks for many details of your business to be double sure about your business functioning and sustainability.

They should be confident before lending you the money. This whole process can be a hassle to small businesses as it involves a lot of tedious processes.

On the other hand, it may seem a big disadvantage to borrow from the bank, but looking at the advantages will make you think again.

For the application process for the bank, you may land up getting some solid referrals for your business that will prove to be profitable for your business in the long run.

Every business differs in its situations and approaches. You may weigh both pros and cons before applying for a loan with the bank, as you are the best judge for your business.

 

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