Business loans are a double-edged sword. They can push your business to new heights and make some challenges seem irrelevant. On the other hand, they can also ruin your business if used improperly. So, let’s have a look at the pros and cons of business loans.
Here we will go over three important sets of information. We will start with “the good”, the potential benefits of business loans. Then we will go over “the bad”, the negatives of dealing with business loans. We will then share the bad news last under “the ugly”, where we will go over the things you should watch out for and avoid.
The Good
There are many brilliant things about business loans. Just keep in mind that to benefit from any of these factors, you need to use them responsibly.
Financial Freedom
Business loans provide you with more freedom than you would have without them. If you have an immediate expense, but can’t afford it, you would normally have to wait. Business loans give you an option for handling that expense so you can move on to other issues. If you use them responsibly, you won’t need to worry about how you’ll pay for your business needs.
Fewer Cash Flow Worries
Many business loans, when used properly, eliminate cash flow concerns. With alternative financing options, or with simple loans, you can ensure your inventory is topped up. You can cover your rent while you wait for your customers to pay. You can pay your employees on time and maintain face.
Many of these challenges require you to maintain consistent cash flow if you don’t have a business loan. Unfortunately, most businesses can’t rely on that consistency all the time. So, you can use a business loan when these problems arise.
Avoid Disasters
Not being able to pay your rent on time isn’t usually the end of the world. However, if it becomes a habit, you will likely run into trouble fast. This is just one of the expenses that shouldn’t be missed.
One of the worst things a business owner can do is miss payroll. In fact, not paying your employees on time, for any reason, is illegal. Your employees likely won’t care too much for excuses about invoices not being paid for yet. They are likely living paycheck-to-paycheck and will be greatly upset should you prove to be an unreliable boss. Not paying employees is a fast way to ruin your reputation and business.
When it comes to avoiding these disasters and more, business loans provide an answer. Fast business loans can avert sudden problems. A business line of credit can also be used to ensure you have funding when these issues pop up.
Expansions
While this is a riskier use for business loans, you can use them to fund expansions you normally can’t immediately afford. A new vehicle (or vehicles), a large purchase, or a new warehouse all cost a lot of money. Business loans can make these things a reality.
The Bad
The pros and cons of business loans are both numerous. There is no point in discussing the potential benefits of business loans without going over the potential negatives.
You’re Always Going To Lose Some Money
Taking a business loan is always more expensive than paying through your savings or working capital. Unless you’re taking the business loan to avoid an extra fee or penalty, you are taking one at a loss. Fees and interest will always cost you something.
If you can pay for any expense on your own without putting your business at risk, it’s usually a better option.
You’re Always Taking A Risk
Even if your business is highly stable and your credit score gets you access to better rates, you are still taking a risk. Failing to make timely repayments for any reason will exasperate the cost of your loan. We will go over the potential results in a moment…
The above applies regardless of which kind of loan you take. Even with alternative options you are putting your cash flow at risk.
The Ugly
High Interest Rates
High interest rates can destroy a business that’s already struggling. With many business lenders, their rates are so high that missing payments can quickly send you spiraling into an inescapable debt cycle. This should be avoided as much as possible.
Pay particular attention to the APR offered with any loan. This rate will give you an idea of the costs of borrowing a loan. With APRs that go above 25%, you are playing with fire if you don’t have a solid repayment plan. Those loans can lead to you having to pay the lender potentially twice as much as you borrowed from them in the first place!
Take this factor especially seriously, as it’s been the death of many businesses before yours.
Stupid & Sneaky Fees
Many business lenders charge fees that drive the cost of a loan even higher. You should pay attention to these fees and factor them into your repayment plan.
Application fees are the first ones you’ll need to deal with. The lenders that charge them don’t likely make a large share of their money off them, but they’re still worth considering.
Another particularly stupid fee is the prepayment fee. These are fees that a lender charges if you pay your loan off early. While this may sound ridiculous to a borrower, keep in mind that a lender will want you to keep a loan open for its entire intended length. That way, they can make the highest potential profit from interest payments.
Parting Advice On The Pros And Cons Of Business Loans
The pros and cons of business loans are closely attached. You can benefit from them greatly due to the flexibility and freedom they can offer you. However, you can also lose all that flexibility and freedom if you make mistakes.
If you take a loan that you don’t have a strong plan for paying back, you will most likely experience some of the “bad” and “ugly” side effects of business loans. However, strong planning, responsibility, and education can help keep you on the “good” side.
Maintain A Higher Credit Score When Possible
Maintaining a higher credit score will allow you to access better terms on any loans you take. This will reduce all the potential negatives we’ve discussed.
