3 Disadvantages of a Business Loan

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Home » Business Finance » 3 Disadvantages of a Business Loan

Running a small business can have its ups and its downs. When things are going well, there’s no better feeling than earning a healthy income from your own business, although there may be times where things are slow and you need an injection of cash to keep your head above water.

This is where business finance can really come in handy. Knowing you can borrow cash when you hit a sticky patch or you require extra funds to expand is reassuring, and this safety net for businesses has been around for almost as long as commerce itself. In fact, the first credit system that was created around 3,000 years ago is the ancient civilisation of Mesopotamia, so it’s safe to say this form of finance has stood the test of time!

But despite the undeniable efficacy of business loans, this type of borrowing is not without its drawbacks. As with all types of lending there are pros and cons, so to give you a well-rounded view and help you make an informed decision, here are the main disadvantages of business loans.

Can be secured against assets

Depending on how much capital you require and how healthy your credit history is, you may need to put up collateral to receive approval for a business loan. This is because the lender wants to know they’re covered in the event you default on your payments.

Most business owners won’t see this as an issue, but if profits suddenly take a turn for the worse then you could be at risk of losing your home or assets, so think long and hard about this before jumping right in and applying for a loan.

Instead of your private assets you may want to consider invoice finance if you have capital tied up in unpaid invoices. With invoice finance, the unpaid invoice is effectively the security.

Not all businesses will qualify

Lenders have strict rules in place that govern whether a business will receive approval for a loan or not. Unfortunately, not all businesses will meet the criteria and in some cases this can result in your application being rejected.

While this isn’t the end of the world and you could always apply with a different bank, multiple applications can have an adverse effect on your credit score. This can also reduce your chances of being approved, so do your homework and find out what the bank will asses you on to make sure you don’t waste your time and damage your credit score.

Loans are inflexible

When you take out a business loan, the repayment terms are set and there’s not much you can do to change them. This means that if you experience some short-term difficulties or your business is seasonal, you’ll still need to keep up with the repayments despite a downturn in profit. This can present issues for some businesses and is something to consider when taking out a loan.

Merchant cash advances

If you’re struggling to get approval for a business loan due to poor credit, lack of assets to use for collateral or you’re worried about the regular repayments, one alternative is a merchant cash advance.

Merchant cash advances are similar to a loan in that you’ll have access to a sum of cash that you’ll need to make regular repayments for until it’s cleared. Where this type of finance differs is instead of paying the same amount back each month, your repayments will be deducted as a percentage of your debit/credit card sales.

This means that if you experience a downturn in trade, you won’t be required to keep up with large repayments and it’s also much easier to get approved as lenders won’t run a credit check or ask you to put down any collateral, making this a flexible and convenient alternative to a traditional business loan.

At Quote Goat we compare merchant cash advances from many of the market’s top lenders. Our price comparison page scours the market for some of the best deals around which could help you save time and money, so if you’re interested in a merchant cash advance then compare with Quote Goat today!