Loans are one of the classics of financing personal investments, such as a home, a car or your children’s education. Loans, especially (small) business loans are also very suitable to finance your business.
Taking a loan from a bank means you borrow money from a bank. In return, the financial institution expects interest and a timely repayment of the loan. Always keep in mind that the bank will expect repayment and interest and they are going to find one way or another to get it back, even if you are broke.
Borrowing money from a bank has several advantages:
- Unlike professional or private investors banks will not have a say in your business operations and how you manage your loan. It will be your decision alone how exactly you spend the money as long as you keep the bank in the loop.
- Banks don’t get a share of your profits. They only expect debt repayment and interest. After having paid your debt there will be no commitment to share profits with the bank. However, do pay attention and read the terms and conditions of the loans carefully, repayment terms of the numerous commercial loans may vary.
- A loan that is specifically intended for business purposes usually has a low interest rate in comparison to many other funding options. Especially compared to borrowing money through credit cards and finance companies can involve huge fees and interest rates.
- You can deduct the interest payments on your business loan from your taxes.
- A business loan is available for immediate use, builds a credit rating (which helps in securing future loans) and also creates a good financial reputation for your business from early stages.
- Interest rates are fixed in the contract with the bank. Hence, you can calculate precisely when and how much you have to pay back. This makes a bank loan a funding option that is very easy to plan for the future. If you read all the terms and conditions carefully when setting up the contract there will be no bad surprises in the course of taking and repaying the loan.
- A loan also offers you the possibility to build a relationship with a professional banker. This relationship might prove very useful in the later stages of your business, when you are on the lookout for more money.
All of these comfortable services, however, come at a cost:
- Before you see the first Rupee, banks have a close look at your business plan and want to know exactly, when, where and why you are planning on spending the loan. This requires a lot of planning and thorough preparation of paperwork when you apply for a business loan. Banks want to know about your business’ potential structure and general modus operandi, they demand information about other potential investors, and profit and cost predictions. The whole process can be very lengthy and time consuming. This thorough review process is applicable especially to startups, as banks take on a higher risk by giving a loan to young businesses that do not have steady revenue yet.
- If you take a bank loan you might run at risk of losing a valuable asset (stocks, land, house). Most commercial institutes will insist that you provide collateral in the form of a property asset in order to secure themselves. In case your business fails and you cannot repay your loan, the lender can reclaim its debt by selling whatever you proposed as security.
- The rates for a bank loan are dependent on government policy and the whims of the market. Rates may fluctuate in the early stages while profits may not be able to keep up. Remember that small business loan interest rates tend to be high at first and continue to increase as you borrow more money from the bank.
- You might have to hand in regular (quarterly or yearly) reports and management information to the bank. The preparation of these reports is time consuming and
- Loans are not flexible options. As they are planned and fixed for the course of several years you might end up paying interest on money that you are actually not using.
Getting a bank loan can take a lot of effort and time. You will have to consult several banks, compare the options, interest rates, fees terms and conditions and prepare an extensive presentation of your business to every bank. Be prepared to be rejected at a lot of financial institutions and plan a lot of time for getting a good loan. It will pay off with a lot of money.