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Small business loan advantages and disadvantages

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Last editedJun 20222 min read

There are many reasons why a business might need to raise finance, from dealing with a slowdown in cash flow to expanding into larger premises or taking on extra members of staff. There are also many different sources of business finance available, from overdrafts and merchant cash advances to invoice or asset finance. The simplest way of raising finance, and the method which the average small business is likely to choose, is a small business loan from a bank. There are small business loan advantages and disadvantages to weigh up when deciding whether to borrow money, as follows:

Advantages of a business loan

Growth

Borrowing money in the form of a small business loan will enable you to grow your business without having to wait for sufficient income to fund that growth. You may, for example, spot a gap in the market which is not being met, and rather than waiting to save the money needed to meet that demand – by which time the opportunity might have passed – you can borrow the money to take advantage and boost business growth.

Control

Unlike other forms of financing, a small business loan enables you to enjoy an injection of cash into the business without surrendering any control. Other forms of finance – such as equity finance – involve selling shares in your company to investors to raise funds and then having to share any future profits with those investors. Once a small business loan has been repaid, you’ll have no obligation to the lender.

Security

Taking out a small business loan with a well-known high street bank offers a high degree of security, thanks to the reputation of lenders who have been established for many decades. As more online lenders enter the market, however, this could shift as disrupters establish themselves in the field of business finance.

Flexibility

Once you have taken out the small business loan, you have complete flexibility in spending it. You’ll need to provide a business plan when applying for the loan, setting out how you plan to use the money, but once the loan has been taken out these plans could be altered and modified.

Disadvantages of a business loan

Criteria

The eligibility criteria for taking out a small business loan are usually very strict. If your business is a start-up or hasn’t been operating for very long, you may not have the kind of trading history a lender wants to examine. If this is the case, or if you can’t provide a high credit rating on the basis of your business, you may be charged higher interest rates as a consequence.

Application

The application process for a small business loan is likely to be long and time-consuming. As well as filling in the relevant forms for every lender you’re speaking to, you also have to provide a business plan, a full history of your account (if any) with the lender and financial forecasts to establish your business credibility. The more traditional banks will often take longer to reach a decision than new lenders.

Amount

In some cases a lender may approve the loan but not for the full amount. They may decide that you don’t need the whole requested loan sum to deliver what you have in mind, or that it would be too risky to hand over all the money. It would be useful to plan for this possibility in advance, working out ways of funding the planned expansion with a lower lump sum.

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