Small Business Bank Loans and Financing—Pros and Cons

A good deal of hard work and adequate monetary support are critical to executing a business idea and get it off the ground. Funds are also important for running day-to-day functions and long-term growth plans of a business. Today, funds for businesses can easily be accessed through banks and non-banking finance companies.

Banks and NBFCs lend money for a set period and, in exchange, charge interest along with a possible processing fee. Business loans, be it big or small, are repaid in EMIs spread over a few years of time.

Unlike large businesses, the smaller ones have restricted access to funding options for many reasons such as requirement of high credit score, extensive documentation, etc. But if a business qualifies for a bank loan, undoubtedly it can be the most affordable way to keep the business afloat. However, a comparative analysis of lenders is essential, especially for small business bank loans.

Benefits Of Small Business Bank Loans

• Interest Rates:

Traditional bank loans come cheaper than any other financing solution because of lower interest rates. The interest rates of these loans depend on a number of factors like loan tenure, market dynamics, applicant's profile, financial condition of the business, etc. The interest rates are even lower for government-backed financing schemes offered by banks and NBFCs.

• Quick Disbursal:

Once the lender scrutinizes the applicant's profile and is satisfied, the loan application is approved and the amount is subsequently transferred to the bank account. Since delay in business can result in missed opportunities, speedy disbursal of funds ensures ready availability of funds as and when required.

• Collateral-Free Loans:

Most small business bank loans are unsecured loans, meaning the borrower need not back it up with collateral. Therefore, there are less chances of a business losing its assets in case of a loan default.

• Boosting Credit Score:

In case of a default in repayment during the loan tenure, most banks report it to credit information agencies. Failure to make payments on time dramatically reduces the credit score. On the contrary, timely payments of EMIs is a great way to build the credit score of the business.

• Better Management Of Finances:

Bank loans are a convenient way of raising money without the business requiring to wait till the time it has generated enough revenue. Since most lenders offering small business loans do not specify how the funds should be used, the money availed through loans can be used to maintain a healthy amount of cash flow essential to keep a business running. The revenue generated from the business can be used to repay the debt and the surplus can be saved for future investment.

• Tax Benefits:

Under the Income Tax Act, 1961, the interest paid on small business loans are eligible for tax deductions.

However, since there are many types of funding options to consider, it is better to be informed about the advantages as well as the disadvantages of bank loans for a healthy decision.

Disadvantages Of A Bank Loan

• Strict Eligibility:

The main problem one faces while applying for a bank loan is stringent eligibility criteria. Not all businesses are eligible for a bank loan. Businesses with bad credit or negative cash flow may face trouble qualifying for bank loans. Moreover, banks prefer large businesses over small businesses.

• Tedious Application Process:

Applying for a small business loan can be a lengthy and time-consuming process as it involves a lot of paperwork. Not only must the applicants fill the lengthy application form, but they also need to provide a number of essential documents along with a detailed business plan. Banks validate every document, run a background check and then decide if the business is eligible for a loan or not.

• Need For Collateral:

Sometimes banks may necessitate small businesses to put up some security in order to get a loan. As such, many small businesses risk their business assets and even personal resources to get secured business loans for lower interest rates.

Alternatives To Small Business Loans

Apart from traditional small business loans, small businesses also acquire finance through personal loans. While some small businesses may raise finance through their vendors, some fund their needs from social networks as well.

In the last few years, a number of small businesses have benefitted from special loan schemes designed by the government to boost small business units across the country. Also, there are some large business conglomerates who offer financial assistance to small business units that show promising returns in the future.

Conclusion

Every business requires financing from external sources at some point of its growth. It could be used for setting up a new factory or office or for meeting working capital requirements. The funds may also be used to purchase raw materials or inventory.

But how to decide if a small business loan from a lender is the right step for a business? To decide that, it is good to compare loans offered by different banks. While choosing the lender, it is also necessary to select the type of business loan that is right for the business.

IIFL Finance offers different types of business loans for small and medium-sized enterprises to choose from depending on their needs. Prospective borrowers can apply for a business loan through the IIFL Finance portal for a hassle-free experience and quick approval. IIFL Finance offers both secured and unsecured business loans through a fully digital process and even customizes the repayment schedule to match the borrower’s cash flows.