Benefits and Disadvantage of Small Business Loans

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Entrepreneurs and small business owners seeking funds to grow their businesses can either borrow from lenders or raise equity from investors. Finding new equity capital is time-consuming and requires participation in future profits, and owners can lose control of their company, with management decisions subject to approval by an external board of directors.

Myths and legends aside, there is no evidence that corporate debt harms the long-term health of a small business or its owners. Warnings about borrowing, passed down from generation to generation, have been circulating for centuries to warn against taking on corporate debt.

This is a financial strategy that should be adopted, not despised, and here is why a small business loan might be just right for you.

Drawbacks of Small Business Loans

Terms of Repayment Are Fixed
The terms of a loan are clearly established at the time debt is extended, and lenders are reluctant to amend terms unless they receive additional benefits, such as higher interest payments, additional security, or authority over future cash expenditures.

Repayment Reduces Future Cash
Although borrowing initially provides cash or working capital, debt repayment can have the opposite effect, requiring cash that might otherwise be used for investment or dividends to the owner or spent in the future.

Lenders Can Be Hard Taskmasters
Corporate loans come in many forms, each with its own purposes and characteristics, but the following are the most common. No matter how cordial and polite the lender may be during the initial loan term, they are always a partner of the seller.

If the company gets into trouble in the future, the lender’s only interest is to protect the repayment of the loan, even if it leads to the company’s bankruptcy.

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The Benefits of Small Business Loans

Administrative Simplicity
Seeking funding from a lender is straightforward and often a matter of completing basic forms and providing financial statements. Equity investors require periodic reports on operations, possible shareholders meetings, and board approval before taking certain actions.

Retained Ownership
In the case of equity, the lender does not participate in the company’s profits and losses, but only in its shares in other companies, such as its shares.

Management Control
The lender does not make personnel, financial or operational decisions, and its only interest is whether the borrower complies with the terms of the loan.

Clear Terms

The terms of a loan – such as principal amount, interest rate, repayment terms, and collateral, if any – are unambiguously established at the onset of the loan and do not change during its life

Tax Benefits
All interest paid on business loans is deductible from taxable income, which means that the entrepreneur effectively shares the cost of borrowing with the tax authorities.

Speed of Funding.
Borrowers typically use well-established sources of finance to guarantee and finance the amount borrowed. Finding a lender is often as simple as filling out basic forms and filing a financial statement.

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