Small Business Loans – Advantages and Disadvantages

advantages

• Retain Ownership. Instead of raising funds by selling an interest in your company to an investor, you retain the current ownership of your company. The lender is only entitled to an interest return on its loan, not a percentage of the profits or a share in the company that an investor would expect.
• Financial Flexibility. The proceeds from the loan can be used for almost any purpose including paying off current debt to avoid higher interest rates, short repayment term, or pending balloon payment. A loan also allows you to preserve your cash and working capital.
• Better Cash Flow. A loan gives you access to capital with minimal up-front payments and the flexibility to design a loan schedule that suits your needs. You can organize your loan schedule to match your payments with the projected cash flows from the proceeds of the funds this will help you minimise the drain on your working capital.
• Borrower is legal owner of equipment. If you decided to take a loan against your equipment, unlike some other forms of financing you remain the legal owner of the equipment.
• Maximize Financial Leverage. Normally you can use your refinance most of your assets, real estate, commercial equipment and vehicles, to arrange for a loan and may free up cash flow for other pressing needs.
• Simplified cash flow management. Loan schedules are preset, making cash management more predictable. Tax advantage. Interest payments on your loan are tax deductible and are made with pre-tax money. Purchases financed with profits, in contrast, are made with after-tax money.

disadvantages

• Additional guarantees. Depending on the credit rating of your company, the lender might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank.
• Collateral. The lender may insist on a pledge of some asset to secure the loan. Under a security agreement (for personal property), if you default on the loan, the lender is able to foreclose upon the asset and sell it to repay the money owed to the lender. If you are required to provide security, try to limit the amount you have to give to secure the loan. And make sure that when the loan is repaid, the lender is obligated to release its mortgage or security interest and is required to make any government filings acknowledging this release.
• Defaults. The lender may define a variety of events that will constitute a default on the loan, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the loan documents. Try to negotiate advance written notice of any alleged default, with a reasonable amount of time to cure the default.