Business Loan: Advantages and Disadvantages

Business loans serve as a powerful tool to help fund, launch, and grow a small business. As a small business owner, you may be looking to secure financing to maintain business operations, expand locations, invest in new equipment, or hire more employees. A business loan helps you achieve all this.

Not sure if a business loan is right for you? In this article, we break down the advantages and disadvantages of taking out a business loan, as well as questions to ask yourself if you’re still overwhelmed.

Advantages of Borrowing

Receive an influx of cash to grow your business
The easiest and most obvious way to gain major cash flow is to take out a business loan. If your business is at a stage where it’s ready to launch, expand, or grow its operations, business loans are a good choice. Compared to other funding options, you access a relatively large amount of capital for multiple purposes.

Maintain control of your business
Unlike borrowing equity (where business issues shares), taking out a business loan from the bank provides you full control over your business. Banks don’t get involved in any aspect of running your business, which means as a business owner—you retain full control and management over your company’s operations, while still reaping the benefits of extra cash.

Interest is tax-deductible
The words “tax-deductible” probably ring in your ears: it’s great news. Interest on your business bank loans is tax-deductible. This is particularly so with fixed-rate loans, in which the interest rate does not change throughout the course of your loan. This makes it much easier for small business owners to budget and plan for monthly loan payments!

Disadvantages of Borrowing

Tough to qualify
Unless you’re a small business owner with a considerable track record of valuable assets (i.e. real estate), then, unfortunately, it’s highly difficult to obtain business loans. Like applying for a mortgage, banks are extra careful with lending. They want to make sure that you can pay them back. Often, borrowers must provide the bank some sort of guarantee, such as having their personal assets seized in the event the business fails and is unable to repay all or part of a loan.

High-interest rates
Another disadvantage of small business loans is high-interest rates. In addition to that, often the amount a business qualifies for is also not enough to meet a company’s needs.

Borrowing money at a high-interest rate serves as a disservice for the business, as it often has to deal with the business loan and additional funding to cover funds not provided by the bank.

Questions to ask when considering a business loan
Borrowing money for your business comes with its pros and cons—as with any business decisions that involve money. If you are still unsure about whether a business loan is right for you, here are several questions to reflect on:

  • How much funding do I need?
  • What is the timeline in which I need the money?
  • Do I qualify for lender requirements?
  • And if so, how do I plan to spend the money?

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