Articles in the Series:
- Pros and Cons of Using Own Money
- Pros and Cons of Credit Cards
- Pros and Cons of Borrowing from Family and Friends
- Pros and Cons of Bank Loans
- Pros and Cons of SBA Loans
- Pros and Cons of Angel Investors
- Pros and Cons of Venture Capital
- Pros and Cons of Crowdfunding
- Pros and Cons of Business Plan Competitions
- Pros and Cons of Supplier Credit
Pros and Cons of Bank Loans
Applying for a bank loan is one of the options for financing a business. Learn the pros and cons of getting your startup financing from banks.
Advantages of Bank Loans
- Easy to get and offers lower interest rates and higher credit limits – if you have great credit and plenty of money or collateral.
- Allows you to build your small business credit file.
- Banks are convenient and accessible.
- You can even enjoy personalized service from bank managers and/or employees.
- You have the autonomy and freedom on how to use proceeds however needed. Banks don’t have any say in how you use the money; or even in how you manage or run your business.
- Unlike venture capitalists and investors, banks are not interested in getting ownership of your business. Banks are only interested in getting their interest and partial loan payment installments.
- Interest payments (but not principal repayments) can be deducted as a business expense in your tax returns.
- Banks offer a number of loan options that will work best with your objectives.
Disadvantages of Bank Loans
- Banks will not give you money if they view you as a risk. If your credit it not good or you don’t have the funds, bank loans are difficult to get. Banks will also not give you a loan if you are in an industry they consider as “high risks” such as home-based businesses; or that you have not clearly demonstrated your experience and knowledge in operating such business.
- Banks are very conservative lenders and will require you to personally guarantee the loan with assets that you might not have.
- Banks require collateral, and there is a risk of losing the collateral if you are unable to pay the loan. You risk losing your house, property, investment portfolio and other assets should the business fail to take off.
- Application process is lengthy and banks have a long list of prerequisites to qualify for a loan. Review and approval process can take a long time.
- Banks do not give 100% of the amount requested. Instead, they may grant 70-80% of what you need; thus requiring you to find other possible sources of funds.
- Preference is given to existing businesses with proven profitability. Plus, running businesses often have credit history that they can use for evaluation.
For more information, read 12 Tips for Getting Your Bank Loan Approved
- How to Find an Angel Investor for Your Business
- How Angel Investors Can Benefit a Small Business
- How to Start a Business with Bad Credit
- 5 Strategies to Raise Capital for a Small Business
- 12 Tips for Getting Your Bank Loan Approved