Every business is dependent on its financial investment for its growth. When a business is in its growing phase, it may become difficult at times to feed it with the required capital because of financial constraints.
But, it is important to suffice your business with the required finances to realise its full potential. These times may make you explore different finance opportunities to cater to your business necessities.
Among all the available options, bank borrowing is one of the common and preferred options. It is the traditional way of financing your business and has been a popular way since the existence of capitalism.
Make the right use loan of the facility
Bank borrowing may seem easy and beneficial, but there are disadvantages too. Before borrowing a bank loan, it is essential to know the pros and cons of bank borrowing.
In Ireland, along with the banks, there are many direct lenders and financial institutions that offer urgent loans facility. These institutions also offer high acceptance loans.
This blog collates all the pros and cons of bank borrowing to make you aware and informed:
Advantages
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Facilitate Large Purchases
Asset building (large purchase) is an important part of business and becomes necessary at some point or the other. A bank loan is a good way to finance your purchase, such as a vehicle, property, or machinery.
Bank financing is beneficial for a business setup as huge investment is required in the initial stage. Also, with the initial setup, it helps in the growth phase of a business when expansion is involved.
Without financing from the bank, it may become impossible for some people to start their own businesses and be successful entrepreneurs.
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Maintain Ownership
Generally, when you plan to borrow from a bank, there are no guidelines from the bank’s side for the usage of the loan money. Neither you are required to get into the nitty-gritty of your spending.
This proves to be one of the beneficial points for bank borrowing. If you think of borrowing from some external source other than the bank, there is some kind of influence for running your business in a certain way.
Also, borrowing up from sources other than the bank may require giving up some part of your business in return for the money being borrowed.
But in the case of bank borrowing, you do not give up on anything in exchange for the money borrowed.
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Flexibility
There are many variables involved in bank borrowing, such as the loan term, the fee involved, interest rates etc. These factors may differ from bank to bank depending upon the location, loan amount and the borrower.
Some of the factors are negotiable and can be moulded in your favour. The freedom to shop as per your requirements is one of the key benefits involved in bank borrowing.
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Credit Improvements
Long with giving a loan, you can improve your credit in the process. Depending upon your debt situation, if you wish to improve your credit score, you can work upon it while borrowing a loan from the bank.
Making a payment on time for your loan and maintaining proper records will help you to improve your credit score. If you make all the payments on time without giving a miss and gap, it will contribute to improving your credit score.
Disadvantages
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Risk Foreclosure
In the case of bank borrowing, the bank may not take up ownership of your business, but if you fail to make the payment to the bank, you risk your business foreclosure by the bank.
If you are unable to pay back the loan, you improve the probability of foreclosure.
Mostly the loans are secured, i.e. they are backed up by collateral or a mortgage. This is the subject with the majority of business loans. If you are unable to pay back the loan, the bank will claim your asset or the collateral.
In case of extreme cases, when an entrepreneur becomes a defaulter, and large amounts are involved, the bank has the right to take over your entire business.
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Guarantee Secured
Another option on the loan is to secure it by guarantee. If someone else has given security on your business loan in the form of assets, then in case of default, someone else is being put at risk.
If the bank takes over your business, the option is to liquidate or disband your business as a whole which can prove to be disastrous for many entrepreneurs.
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High-Interest Rates
One of the disadvantages of bank borrowing is the high-interest rates involved. The interest rates may change because of the variable interest rates.
The variability involved may make it difficult for an individual to repay the loan. In case of the downfall of a business, many banks tend to make their terms harder and unfavourable to follow.
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Risking Credit Score
You may get a bank loan easily based on your good credit score. But if you are unable to pay your bank loan on time, you may put your good credit score at risk.
If you are borrowing a short term loan, there are high chances of risking your credit score. Whereas long term loans are a better option as one missed payment can be corrected by making future payments on time.
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Complicated Application Process
Bank loans are an easy option, but the process of applying may become a tedious task. The application process is a complicated and lengthy one.
The bank secures every aspect before lending money to an individual. It is applicable to every entrepreneur irrespective of the business scale.
According to a survey, many small businesses fail in their initial phase due to the lack of the required knowledge or the right approach.
This failure may make it difficult for entrepreneurs to pay back the loan on time. Therefore, before lending money to entrepreneurs, banks gather all the important information about the business and the individuals to safeguard their money.
Conclusion
There are many benefits of borrowing a loan. If you are borrowing, always be careful of its repayment. Do not make any delays in the repayment. Also, making effective use of loans can help you stay on top of your finances.
