I will share advantages and Disadvantages of Bank Loans. You can check weather you should take bank loans or not. Read all the pros and cons of bank loans.
What is a loan? A loan is any sum of money that can be borrowed from a lender for a plethora of reasons with an agreed repayment schedule set over a period of time. The amount to be repaid always depends on the amount being borrowed, the period of time for repayment and the interest rate placed on the loan.
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On the average, loans are mostly used for capital for start-ups, asset payments and situations where the amount of money needed is fixed. The price of loans, the interest rates, and the terms of repayment usually depends on the providers. It will also reflect the cost and risk to the bank providing the loan. In the cases of really large sums of money, the pricing and terms of repayment may be negotiable.
Advantages of Disadvantages of Bank Loans
A bank will loan money to any business on the grounds of an adequate return for their investment that will reflect the risks of defaulting and to take care of administrative costs. For people that have already established working relationships with their banks, their banks would have developed a proper understanding of their business. This is better as it aids the bank in giving customers advice on the financial need that best suits them.
Below Are Some Of The Different Types Of Bank Loans
- Fixed Asset Loans: Fixed Asset loans are mid to long term loans issued by the bank to borrowers for purchasing assets where the asset itself is collateral.
- Hire Purchase Loans: Hire purchase loans are issued by the bank to customers for the long term purchase of assets like machinery or automobiles.
- Factoring Loans: These are issued by the bank and are based on the money that a business’ customers owe the business.
- Working Capital Loans: Working capital loans are quick loans issued by the bank for emergency situations or on short notice.
Advantages of Bank Loans
Other types of bank loans include credit card loans, secured loans, personal loans, Home equity loans, credit card cash advances, startup capital, etc. There are also five main costs needed to be considered for a bank loan. These are arrangement fees, interest, insurance, covenant compliance cost, and professional advice.
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Arrangement fees are administrative charges payable to the lender to cover the opening cost. Arrangement fees can vary depending on the size of the business, the type, and the sum of money to be borrowed. Interest is a percentage amount placed on the loan by the lender. Interest may vary depending on the risk of default.
Disadvantages of Bank Loans
The two most common types of interest are fixed and variable interest. Insurance may be a condition of a specific loan application; that is, it does not apply to all types of loans. The cost of insurance varies on the credit score of the borrower. Covenant compliance is only required in specific situations. This includes information such as the borrower’s current management accounts and / or cashflow projections. This information is usually only required as a condition of the continued availability of the loan. It usually advisable for a business to hire professionals to help them consider all options and draw up a projection chart for loan repayment.
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Pros Of Term Loans
- Repayment holiday. As the name suggests, a repayment holiday is a sort of break from your debt repayments for an agreed period of time. An advantage of a term loan is that during negotiations, the lender may be able to negotiate a repayment holiday where they only pay interest on the loan for an agreed period of time.
- Application process. The Application process for a term loan is very simple and straight to the point.
- Term loans are not repayable on demand. This means that it is available for the term of the loan which usually lasts a period of three to ten years the only problem that arises here is if the loan conditions are breached by the borrower.
- The borrower is not obligated to give the lender a share of their profit or a percentage of their company. The only hold the lender has is the interest placed on the loan which has to be paid in full.
- Term loans are directly tied to the assets you are borrowing the money to pay for if you want it that way. This remains a choice for both parties and must be agreed upon.
- In some cases, an arrangement fee may be paid at the beginning of the term of the loan. Arrangement fees do not span the timeline of the loan, only the beginning, except it is an on-demand loan where the arrangement fee has to be paid annually.
- Term loans usually have fixed interest rates. This means that the interest rate remains the same throughout the span of the loan and the same amount can be paid at regular intervals.
- Loans also help to increase your credit score. However, this only works if you meet up with your monthly payments. Just one miss can take several points off your credit score.
Cons Of Term Loans
Loans are not very flexible. You could somehow end up in a situation where you’re repaying a loan you never even got to use because something came up, but you cannot just return the loan because you already made an agreement. Some loans have some very specific and strict rules and terms you have to adhere to. For example, a student loan can only be used for tuition, a mortgage is only used for property. Another example that usually only applies to loans for very large sums is the provision of quarterly management information.
For secured loans, you have the risk of using your collateral. Loans are usually secured against your personal possessions such as your house or your car or business assets. Secure loans usually have much lower interest rates than unsecured loans but again, you stand the risk of losing your collateral. For a business owner who survives on the day – to – day cash inflow, loans will come at very high risk for you.
This is because you rely on a daily income from customers and the reality of life is that some days you are bound to have fewer customers than other days. On some unfortunate days, you might not even have any customers at all. With a fixed repayment plan, this can get risky because you might not be able to meet up with the monthly repayment and this reduces your credit score.
In cases where you are able to succeed early on your reason for taking a loan and you have the full repayment ready before the timeline of repayment is over, you might have to pay extra charges; especially if the interest rate on the loan is fixed.
Why A Loan Might Not Be The Best Option For You
When you have ongoing expenses, (ongoing expenses are the day – to – day expenses needed to run a business), it is not advisable to apply for a loan with fixed payment because it may be difficult to keep up with repayment. A better alternative would be to fund expenses with cash received from sales. If you have tried to apply for a bank loan and your application was not approved or you decided that a bank loan is not for you, there are other types of loans available.
Hope you understand about advantages and disadvantages of Bank Loans.