Ashley Corn July 8, 2021
Bank loans are a great option for people who are willing to borrow funds. Every loan is time-bound and is a good way to fulfil your financial needs. Also, every loan has its own pros and cons and varies from lender to lender. Out of all the options, bank loans are the most reliable ones and are the best way to finance a small business. They are often offered in exchange for collateral and a good track record with the bank.
The importance of bank loansIn the UK, there are various forms of borrowing credit in the market. Borrowing a loan over all other forms of credit is usually beneficial. There are many loan options available with the bank that involves different terms and conditions. Easy loans in the UK are one such option. You can get a better interest rate if you have a good track record. With revolving credit, you are offered an option of payment flexibility. With the option of a loan, you have to be regular with your payments every month.
Advantages of Bank Loans
- Being Temporary The bank loan is temporary in nature, as once the borrower completely pays the loan, there is no further obligation between both parties. Compared to equity finance, loans are a much better option as the shareholders are paid dividends as long as the business exists.
- Tax deduction in the form of interest The loan interest is tax-deductible. In a fixed-rate loan, the interest rate does not change throughout the course, and hence the loan servicing payments also do not change and remain the same. Borrowing a bank loan makes it easier for businesses to plan their monthly payments and manage with a single spreadsheet if there is a change in rates.
- Facilitate your business growth If you plan to borrow finance for your business, you may give a very good chance to your business for growth and expansion. You can use the borrowed money in implanting your planned projects and areas such as hiring more employees and moving to a new and bigger infrastructure. Your business may be growing slowly, but borrowing this amount may speed up the process of your growth. This is because you did not get this surplus money through your regular sales. Instead, you received this money from an external source.
- No interference by the bank Another benefit of the bank loan is that there will be no interference by the bank as to how do you use your borrowed money. You just have to ensure to make your repayments on time. If your repayments are on time, bank will not be interfering further. You are free to utilize the loan amount in whichever way you want.
Disadvantages of Bank Loans
- Difficult to qualify One of the greatest disadvantages is that they can be difficult to obtain due to the strict cross-checks involved. If you have a good track record, it may be easier, but otherwise, it cannot be easy. Banks are very careful to lend money because of the repayment terms involved. Many businesses are likely to default on the payments that make them less preferable for bank lending. Also, borrowers need to provide a guarantee while borrowing the loan amount. In case of default, the bank has the right to seize the assets of the business.
- High Interest Rates In the case of a small business, interest rates can be higher as compared to other borrowers. As small businesses do not qualify for bank lending, they are charged a higher rate of interest there are more chances of default. This is difficult for the business as they have to manage sources from other finds to fill the gap between the funds by the bank and their actual needs. These bank loans are beneficial, but the terms to qualify these loans are stringent and strict.
- Strict eligibility criteria Banks are cautious while lending money to the business. Hence they keep their eligibility criteria strict. Any lender would be worried about the repayment of their money. In case the borrower defaults at making the payments, the lender is at a loss. Therefore, they have to keep their borrowing conditions strict. These strict criteria often make it difficult for small businesses to apply for a loan.