The first thing that comes into a prospective business owner's mind when sourcing for money to start up their business is to go to the bank. It's convenient, safe and regulated, why would you go anywhere else?
But people must keep in mind that for most things in life, there are its pros and cons. Before you jump on the corporate banking business loan bandwagon, take a while to consider your options and make an informed decision.
The Advantages
Convenience and multiple loan options - Besides a standard business loan, banks can provide a selection of loan choices for you to consider. Even non-commercial loans that are able to be used for business purposes including personal and home-equity. What's more is that there's probably a commercial bank no more than 10 minutes from your house.
The bank has little to no control over how you spend the money - If the bank reviews your business plan and approves the loan to you, the money is essentially yours to do with as you wish. Since you are already in agreement with the bank on the interest rate for them to earn from you, they have little to no say what you do with the money. If you decide to use it all to travel the world instead of starting a business, well that's your choice (although not a very good one).
This is a non profit sharing arrangement - Unlike business partners, venture capitalist funds or any other sources of capital, the bank is not entitled to any of your profits. Besides repayment of the loan plus interest, you do not need to split your profits between any other investors.
Interest rates may be low - The interest rates the bank can offer may be lower than other sources of financing such as credit cards and finance companies. Although not as low as borrowing from friends and family of course.
Commercial loans payments are often tax-deductible - You will need to check with your local tax department, but you may be able to get tax deductions related to the interest payments you are making on your business loan.
The Disadvantages
It may be hard to get a loan - Banks will probably require you to show them your business plan and convince them that your business has a chance of making a profit. If they don't believe in your product/ service they could easily refuse you the loan. This is to ensure that when they loan out money, they are sure to get it back. Also, standard business loans are often limited to pre-existing businesses that have a financial history of success.
Application for a loan can be lengthy - Bank loans may require more information and a longer review process compared to other types of sources.
Collateral is usually required - A commercial institute usually requires collateral on the business loan, although this would probably not be required from other types of lenders. This may be quite risky if the collateral that you have to put up is your house or other family possessions.
You may not get all you ask for - Unlike a housing loan, which barely needs any persuasion to qualify for, you may not be able to get 80-100% funding for your business. The return on housing loans is so much better for banks that for a business loan, unless it's quite small, you may only receive 75% of what you ask for. This varies from bank to bank.
So weigh your options before taking a corporate loan from a financial institution such as a bank, it may actually be better for you to find other sources of funding. Friends and family are always a good place to start. Just consider the pros and cons as laid out above and it will help you to come to an informed decision.
by William Lee
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