The Benefits and Drawbacks of Bank Loans
A loan is a sum of money borrowed for a set period of time with an agreed-upon repayment schedule. The repayment amount is determined by the loan’s size, duration, and interest rate. Loan terms and prices will vary depending on the provider and will reflect the risk and cost to the bank in providing the finance. Pricing and terms may be negotiable for larger sums. Banks will lend money to businesses in exchange for an adequate return on investment, to account for the risks of default and to cover administrative costs. If you have a long-standing relationship with your bank, they will have a thorough understanding of your operations. This will assist them in advising you on the best product for your financial requirements.
Benefits of Term Loans
- The loan is not repayable on demand and remains available for the duration of the loan – typically three to ten years – unless you violate the loan terms.
- Loans can be tied to the life of the equipment or other assets for which you are borrowing money.
- You may be able to negotiate a repayment holiday at the start of the loan’s term, which means that you only pay interest for a set period of time while capital repayments are frozen.
- You must pay interest on your loan, but you are not required to give the lender a percentage of your profits or a stake in your company.
- Interest rates may be fixed for the term, allowing you to know the amount of repayments throughout the loan’s life.
- There may be an arrangement fee that is paid at the beginning of the loan but not at the end. If you have an on-demand loan, you may have to pay an annual renewal fee.
- Larger loans will have specific terms and conditions or covenants that you must follow, such as providing quarterly management information.
- If your customers do not pay you on time, you may have difficulty making monthly payments, causing cash flow issues.
- In some cases, loans are secured by the business’s assets or your personal possessions, such as your home. Although secured loans have lower interest rates than unsecured loans, your assets or home may be at risk if you fail to make the payments.
- If you want to repay the loan before the end of the loan term, there may be a fee, especially if the interest rate is fixed.