A small business loan may be their only means of turning their dream of business ownership into a reality. Some may turn to banks or credit unions to obtain the necessary funds. While a small business loan can get a business off the ground, it has certain pitfalls.
1. Tedious Application Process
The application process for a business loan is tedious. There are a lot more complexities when applying for a business loan as compared to personal loans. Banks check and validate every document that an entrepreneur puts in the application, and after that, the banks judge whether or not the business is eligible for a loan. The judgment of the loan’s eligibility is based on a points system that has to be balanced as new data keeps coming in. this is an unvaried and extensive process.
2. Not all Businesses will Qualify for a Loan
There are lots of strict rules and conditions that banks have in place when it comes to approving or rejecting business loan applications. Not all business will meet the criteria laid out by the banks. So, you will need to know how the banks analyse applications before you go ahead with your application. You don’t want to waste time on an application if there is no chance of it being accepted by a particular bank. Dealing with a rejection can be difficult to bounce back from too. You can be left wondering where you should turn next to get the money your business needs.
A lender may require that you put up some form of security to obtain the loan. In essence, you may be putting your personal property at risk if your business does not succeed. Thus, you face the possibility of losing not only your business, but also your home, car or other property.
4. Difficult to Obtain
Many lenders are leery of lending money to upstart businesses and will lend money only to established entities that are in a solid financial position. Even if your new business is able to get the loan, it may not be your desired amount. As a result, you may be forced to scale down the operation or decide against opening the business.
5. High-Interest Rates
The interest rates for business loans from banks can be very high, and the amount of the bank loan that a business is eligible for is not adequate to address the business’s problems. The high-interest rate for the loan a business receives can stunt the business’s development and growth, as the business needs to gain profit from the loan and manage the extra cost of the high-interest rate.
If a business entrepreneur gets an irregular payment method, the interest rates change with the economic market. This makes it harder to calculate the particular amount of future installment payments. Subsequently, it also becomes difficult to make sound financial strategies.
Once you get the loan, it can feel incredibly freeing, especially if you’re using the money to pay off high-interest debt or scale your business in a way that can increase sales down the road. Not all loans give a business financial breathing room, however; money borrowed to buy tangible assets (such as real estate or fleet vehicles) will add to your monthly expenses. Loan payments can cause strain on an already tight profit and loss sheet and reduce your liquidity significantly. Money used to pay back small business loans is money you can’t use for other things.
7. Processing Fees
To authorize a loan, most banks charge extra fees for the processing, which add to the total sum of the money one has to repay the bank. Normally, it is charged according to the loan sum in terms of percentage. The higher the loan sum, the higher is the processing fees.
8. Apply with a single lender
You could wind up paying a far greater interest rate than necessary. Few business owners are aware of those lenders that offer competitive terms. It is important to connect with an array of lenders, which is exactly what the online lending platforms do – they shop for the best terms.
9. Credit Score
Many of the online small business loans will let you peek at the amount and rate you qualify for without resulting in a “hard” inquiry on your credit report. To follow through with the loan process, however, you’ll need to permit bank access your credit history, and this will almost always ding your score by a few points. Add in a creeping total debt load, and this new loan has the potential to put your creditworthiness in a worse place than it was before you applied. If you’re looking to maintain good credit for an even bigger loan or merchant credit down the road, you’ll want to utilize loans and loan applications sparingly.
Finally, this wouldn’t be an accurate list of pitfalls and setbacks without mentioning how hard it can be to get a small business loan in some instances. While some lending platforms, such as those for crowd funding and P2P lending, can offer shorter, more streamlined ways to get funds, traditional loans still ask applicants to give up a lot of financial, tax, and marketing plan info to get in the door. Most business loans ask that you be profitable, have two to three years of sales or profit records, and are willing to demonstrate continued growth for the life of the loan. For a new startup, this can be almost impossible. This is why some startups choose to look into an alternative method of funding – or perhaps a microloan – instead.
Where to get a Business Loan?
FundsTiger provides different types of loans for different purposes. FundsTiger is a popular online loan platform. Our consumers come to us for their money requirements, whether they are short-term or long-term, small-ticket or large-ticket, personal, family, or business. FundsTiger team brings a wealth of international financial knowledge to the table and tailors it to your specific needs. Money advice, credit advice, wealth planning, and, of course, credit are all available to our clients.
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