Many prospective business owners do not have enough money to start a company on their own, so they apply for small business loans. If small business owners use the money efficiently and properly, a small business loan can provide a simple and effective way of starting a business. Although the advantages are crystal clear, one should realize there are disadvantages as well when taking out a small business loan.
Every business needs money.
Think About the Disadvantages
When starting a business an entrepreneur is eager and can only see the positives. It might be easier for an entrepreneur to identify the advantages with little or no thought for the disadvantages. A new business owner should consider disadvantages such as lack of flexibility, long waits for approval, interest amounts, possible binding covenants, access to paid portion of the loan, and the fixed charge the bank will require.
Lack of Flexibility
When you take out a small business loan through a bank there is not a lot of room for change. You are required to meet the terms and payments you agreed to in the beginning even if your company is having tough times.
Interest Amounts
Small business owners will find themselves paying higher interest rates than others would under other circumstances. Business owners will also be required to pay interest on the full amount of the outstanding loan.
Binding Covenants
A bank might impose a legal binding covenant before it will issue a loan. An example: the business owner will be required for the duration of the loan to keep the debt-equity ratio below a certain level. If this condition is breached, the bank can require the business owner to immediately repay the loan.
Long Wait for Approval
No matter how fast a business owner would like the process to go it just is not in her hands. Receiving a loan for a small business may take longer than one or two days. Over the years technology has helped to speed the process along, especially if using electronic transmittal processes. There still are times when the process can be delayed.
Other Disadvantages
There are two other major disadvantages that business owners can encounter. The first is that business owners will not have access to the part of the loan they have already repaid unless they decide to take out a new loan. Secondly, the bank usually will require the business owner to have a fixed charge or another form of security.
