All successful businesses such as NetBet Casino and many others have been faced with challenges that forced them to seek financing. Most businesses, when faced with the decision to seek financing, they resort to taking out bank loans. In light of this, we want to share with you the reasons why most businesses see it fit to take bank loans as a form of financing.
While exposing the advantages of taking out bank loans, we will at the same time highlight the disadvantages that come with taking a bank loan.
Advantages
Cost Effective
One of the major advantages of taking a bank loan is that it is cost effective in terms of interest rates. In comparison to other types of loans such as credits cards and overdrafts, a bank loan comes with reasonable interest rates. As such, it will be much easier (and faster) for a company to settle its ‘debt’ when it takes out a bank loan.
Flexibility
Bank loans are flexible mostly on two fronts. First of all, after taking out a loan, from your deliberations with the bank, you will know when you have to pay back the money and how much you have to pay back. Generally, you pay back the loan in instalments hence you are given a fixed amount to pay at regular intervals mostly on a monthly basis.
This, therefore, differs from an overdraft in which the bank may approach the company at any time and demand to be paid the amount due in full. Also, as long as the company is making its instalments on time, the bank will not monitor how the funds are being used hence the company can use the money in any way it deems fit.
Retained Profits
A bank loan ensures that a business retains all of its profits. When we juxtaposition a bank loan and equity, one notes that with equity, a company surrenders part of its shares to shareholders who in turn will benefit from the company’s profits. This is not the case however with a bank loan as all that the company has to part with is the principal and the interest amount, all profits solely remain with the company.
Disadvantages
Repayment Burdens
When a business takes the decision to take a bank loan, the thinking would be that it will pay up its dues on time. However, things may not go according to plan. When this happens, a business stands to lose some of its assets through seizure. Sometimes, making late payments may be catastrophic as some banks take the decision to report to credit bureaus. This, in turn, affects the creditworthiness of the business.
Strict Requirements
To protect their money, banks usually ask for collateral before issuing a loan. However, with most small businesses, they don’t have the assets to declare as collateral hence it’s difficult for them to get the loan. Moreover, if the bank decides to take the risky decision of approving a loan for a business that does not have collateral, it will charge exorbitantly high interest rates.