For people starting a new business without any business assets, a bank loan can seem the sole option, but it comes with a lot of risks. It is because a bank loan is a more suitable option for a well-established corporation rather than a start-up business.

The rationale behind this is that the loan term is associated with the core ingredient of risk. For a small business which is in quest of loan finance, failing to repay, can put the owner’s own financial security on the line. Today we have highlighted 7 notable disadvantages which you will have to face when you choose bank loan to finance your new business venture:

1.Difficult to Obtain

First of all bank loans are very difficult to obtain. Business loans come with an elongated application procedure and you’ll have to surpass many hurdles in contrast to the obtainment of a personal loan. Before accepting loan request, banks verify each piece into your application; review your eligibility for the loan because banks want to lend only to companies that can evidently repay their loans. 

2.Collateral Requirement

You will not be granted any loan unless you provide the bank with collateral in form of a property or an asset i.e. a land, a house, or stock portfolio. This is one of the requirements of the banks that they use to secure the loan provided. In case of your inability to repay the loan, the bank will sell your collateral to recover their amount. Therefore, there is the likelihood of you losing not only your enterprise but also your property, vehicle or other assets.

3.Entire Amount not Granted

There is actually no guarantee that the bank will grant you 100% of the sum applied for. The bank may only provide you with 80 percent or even less of the amount that you requested. This can make the job difficult for you to begin as you will have to look for the rest of the funding and for this, you will have to find investors and agencies which can give you the remaining amount.

4.No Equity

You should also comprehend that by acquiring the loan for your new business, you are actually giving a portion of the company to the bank. Since you know that loan appears on the liability side of balance sheet, and your business assets are not yours unless you finance them yourself. That stinks, albeit it is the fact. This is why you must be super cautious before applying for the loan and why you have to proficiently use each penny you take.

5.Unstable Interest Rate

Interest rates are the cost of the borrowing and when interest rates mount, banks will start charging extra for business loans. Interest rates depend on government’s policy and the economic influences and can ebb and flow anytime, whilst your earnings may not be able to prop up. This indicates sometimes you will also have to allocate the further amount to pay the interest on your loan which can hurt your profits.

6.Tying Up Cash

Borrowing bank loans mean you agree to make periodic payments to the bank. Your business can do well, but regular repayments will still not allow you to use that money as capital to finance the growth of your business. Repayment burden is a drawback if we compare it to raising funds via stockholders, as they do not need timely payments. Rather, stockholders are paid with dividends only when the business makes a profit.

7.Credit rating

When you successfully receive your bank loan, you’ll need to make sure you have the cash in each period to make the payment. In case you pay late or default on loans, then your failure to make repayments can harshly spoil credit rating of your business. With a poor rating, it will be hard for your business to take a loan in future.

Author Bio:

Joe Pirest is an MBA from the University of Colorado. He began working in financial services industry in 2002 and helps consumers navigate the world of personal finance. He has also been involved in best assignment help services where he is an active provider of finance-related material.

Published by Joe Pirest