Business Loans – The Advantages and Disadvantages

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It is a common occurrence for small firms or big corporate companies to require financial assistance either for expansion or because they have incurred a huge loss. In such cases, companies take loans from banks; these loans are called business loans which have separate terms and condition. The firm is obligated to repay the loan plus interest as per these terms and conditions.

There are various reasons why companies take business loans. Some firms take for investment purposes; other companies take a loan to pay salaries. Companies also take business loans to increase stocks or for a particular project. Whatever the purpose, the firm applying for the loan should clearly state the reason in the application form so that the lender or the bank can estimate the risks involved and come to a decision.

Taking a business loan is a big monetary decision for a firm because you will have to pay interest (fixed or variable depending on the circumstances) on the principal amount. One should weigh the pros and cons effectively before applying for a business loan. The advantages and disadvantages of business loans  are:

Advantages

1.    Lower interest rates

Taking a business loan from a bank is comparatively cheaper than other authorities. The interest rates are more reasonable; thus profitable in the long run. The lower the interest rates, the lower the EMI to be paid per month.
2.    No division of profits

When banks grant business loans to companies requiring financial assistance, they expect a repayment of their loan amount plus interest. They are not liable to a share in the profit of the firm. However, if one takes a loan from another entity, clauses such as division of profit may arise. Thus, taking a business loan from a bank proves to be profitable in the long run.

Disadvantages

1.    Monthly EMIs

Banks expect a full repayment on their loan amount plus interest; this is what makes your monthly EMI. EMIs are an added pressure and expense on the firm. In case the firm is unable to pay their EMIs on time, it becomes a loan defaulter and then the bank take steps such as taking over the assets of the borrower to recover their money.

2.    Complicated and detailed process

Applying for a business loan is lengthy and tiring process. The firm needs to be eligible to apply for a business loan and meet all the criteria successfully; so that his loan application is accepted. One of the most tedious part of a business loan is to provide valid and verified documents (sometimes original and sometimes photo copy) that vouch for everything you have written in your application form. It is mandatory to inform the bank of any current or erstwhile EMI payments and any standing debts with other entities.

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