Many businesses start in a small way. Ishpreet was also running a small dhaba serving delicious Punjabi food. He had a vision of owning a large chain of restaurants when one of his friends suggested expanding his venture by taking a business loan. He explained that many lenders are stepping forward gradually and opening up to lending to businesses in the foodservice sector.
Ishpreet started calculating the expansion cost using his funds vis-a-vis taking a business loan. He enlisted some pros and cons of availing a commercial business loan as follows:
The Pros of a Business Loan
1. Injects Cash Flow
A commercial business loan injects the much-needed cash required for investment in new equipment, meeting workforce costs, and other business expenses. If the borrower maintains a good credit score, the lenders would be readily willing to lend. It ensures that the borrower need not liquidate his investments to meet the requirements of the business.
2. Convenient Repayment
Banks and financial institutions are pretty flexible in determining the repayment tenure and the amount of EMIs. The flexibility depends on the nature and size of the business and the borrower’s credibility. A borrower may choose payment of fixed EMIs, bullet payment option, or pre-payment of the loan depending on the availability of funds. Further, the lender may increase or decrease the loan EMI based on the business’s financial condition.
3. Affordable Costs
Business loan costs are reasonable and move with the RBI’s base rate. In other words, any increase or decrease in RBI rates leads to a simultaneous increase or decrease in the variable business loan interest rates. Further, the processing fees and pre-payment charges are also nominal.
4. Easy Availability
Many private institutions and banks offer small business loans without any collateral. This makes it easy for business owners to avail and sustain their ventures in economic downturns. Business loan EMI calculators and online applications provided by the lenders on their websites make loan processing much more accessible.
The Cons of a Business Loan
1. Financial commitment of EMIs
Any loan involves a financial commitment in terms of EMIs payable over the tenure of the loan. Businesses witness cyclical upsides and downsides. Paying EMIs in times of a slowdown may be a burden unless the finances are adequately planned.
2. Variable Interest Rate
The interest rate is based on RBI’s base rate. Even if you had procured a loan when the interest rates were low, any increase in RBI’s base speed increases the interest rate on your loan and consequently the EMIs. Though fixed-rate interest loans are available, the fixed rate is generally higher than the variable interest rates.
3. Self-funding
Based on its analysis, a lender may categorize a loan as risky and may not be willing to lend the entire amount applied for. Also, if the loan amount is high, lenders normally require the business owner to contribute a portion of the funds. In that case, the borrower may be required to self-fund to procure a business loan.
4. Collateral loans involve risks
Generally, lenders demand some amount of collateral when approving the business loan. In the case of small businesses, it may be personal assets like investment securities, real estate property, jewelry, etc. The lender may seize the assets in case of repeated defaults in repaying the loan.
Conclusion
While making a financial decision for your business, one should always be careful when taking a business loan. Loans can be a good option for the effective and smooth functioning of the company. But it is essential to weigh your business needs, desire for growth, and risk factors before applying for a commercial business loan.
