A small business seeking to expand its operation often seeks to be financed through acquiring a loan. The processes involved in acquiring a loan vary from one source to another as the business owner has a wide range of sources to choose from, ranging from banks to online lenders. The kind of lender an owner settles for is dependent on factors such as owner’s credit score, lenders interest rates, the underwriting procedures and the documentation required by the lender.
Loans, however, come with merits and demerits, as below:
- Source of finance
A loan is a source of finance for a small business, providing the necessary funds for expansions of the business, financing expenses, asset acquisition and increase in production.
- No profit sharing
Other sources of finance like angel investors give financial support to a business with an aim of owning part of the business as partners together with an entitlement to involvement in decision-making and a part of the profits. In the case of a loan, a lender does not ask for anything else apart from their interest and principal is paid back as agreed.
- Multiple lenders
There exist multiple loan lenders in the market, giving the business owner a variety to choose from. This allows them to settle for what best suits their needs. Such variety also ensures the quality of services offered due to competition.
- Sole ownership
A loan allows the business owner to retain ownership of the business without a foreign party being involved. An owner has the freedom to choose how he wants the business run and does not go through holding discussions and negotiations with any other party.
The fact that procedures involved in getting the loan are minimal with less legal affairs.
- Lengthy application procedures
The process of getting a loan can be cumbersome, especially for banking institutions. They demand many financial documents from the business owner as well as long procedures which end up discouraging the owner from getting the loan.
- Favor for ongoing businesses.
Lenders prefer giving loans to businesses that are ongoing and not those that are still at idea level. This is because it is easier to measure credit worthiness and the profitability of an existing business, making startups to be disadvantaged.
- Loss of collateral
Some lenders, especially banks require that a borrower gives collateral, usually in form of an asset owned by the borrower which will be held by the bank until the loan is cleared. A business owner may lose such property in case they are unable to make full payments for the loan given to them.
- Lower amounts of money
In most cases, lenders give amounts lesser than what one has requested for in accordance with the many complex factors and procedures they have put into consideration. A business owner ends up with a lower amount than what they had budgeted for, causing an inconvenience in their operations.