While starting a business, an entrepreneur needs to consider two points, whether the business idea is viable and whether the project is feasible or not in terms of everything. Provided all other factors to remain favourable for starting the business, funding for the same might be a cause for worry. Starting with your own funds for the business might be quite challenging and not feasible in most of the cases. At this juncture, you have to consider with external funding. With external funding, most of us think about commercial loans from banks and private lending institutions. Other options for managing funds are there, but mostly, the above options are considered to be the most common in practice. Other funding options like Fast Approval Loans and Merchant Cash Advance are there, but take care before going for anyone. However, there are several advantages and disadvantages of these loans and being an entrepreneur; you have to go through them before starting up.
Pros associated with commercial loans:
- This type of loan has a low rate of interest compared than other ways of business funding.
- Commercial lenders are entitled to debt repayment only and not to profits of your business.
- Interest payments on business loans can be deductible on the taxes paid and are very much advantageous.
- Commercial loans offer several key incentives to entrepreneurs.
- Loans of this type are usually of long-term and can range from 3 to 10 years so that entrepreneurs can repay the debt slowly without hampering the business process.
- It covers bulk start-up cost as large sums can be taken as one single loan.
- You can have the entire ownership of your company whereas, in most of the other types of loans, a fraction of ownership or the total profit is owned by the lender.
- Commercial lenders have no interest in how you manage the funds you get a loan; rather they will only review your business plan detailing the potential use of such funds.
Cons associated with commercial loans:
- Detailed information about the business structure, clear project description with every single area to be covered, information about potential investors, profit and cost predictions. A good credit rating is also a vital factor, lacking that might end in rejection of loan.
- Business loans from financial institutions are dependent upon government policies and whims of the market. Rates fluctuate and are usually high in the first place and increase on borrowing more.
- A larger amount of loans often require detailed accounts of the way money or loan will be spent.
- Usually, you need collateral like any fixed asset like home, land, car, etc. as a security deposit to qualify the bank loans. Also, if you are unable to repay the debt from your business, the bank retains the right to seize the asset that has been used as collateral.
- Usually, a commercial bank loan appears to be on the side of liability of the business balance sheet and so it affects the valuation of a business.
- It does not guarantee profit and growth of your business.
Apart from all the points mentioned above as pros and cons, you might find some more, when you actually enter the business after taking the business loan. Whatever, the list might be, you will always find it advantageous to get a commercial loan from a financial institution over other types of funding.