The pros of bank loans
Here are some of the main advantages of choosing to take out a business loan, and opting to borrow from a bank over a different type of lender.
1) Trustworthiness
Picking the right lender for your business loan is important, so it can be a good idea to go with a trusted name. The peace of mind that you get from an established institution can go a long way when you are putting all of your efforts into growing or maintaining your business. Many online lenders will not be the right option for a lot of businesses, especially those that value face-to-face meetings and the opportunity to speak to someone over the phone.
Trust can be particularly relevant if your business already has a relationship with the bank you want to borrow from. If your business has held a current account or other product with a particular organisation for a number of years, it can seem like a simple and easy option to get a loan from the same place.
2) Build your business quickly
Waiting for your business to build up the cash to fund new ideas and future plans can be frustrating. It can also be inefficient, especially if the business misses out on time-limited opportunities as you wait for revenue to grow and cash to acrue. A bank loan can be a quick way to get your business moving and allow you to take advantage of any new opportunities as they arrive.
You can read our article ‘What is a business loan?’ if you need more background on the basics of a business loan.
3) Cost
The headline cost of a bank loan can sometimes seem more expensive than products from online-only lenders. However, you may find that long-term borrowing is cheaper with a well-established bank. This is especially true if your business has a strong credit history and can access the best rates the bank is offering. If a business is profitable and has a solid credit history, there is a good chance a lender will see it as a reliable borrower. The most reliable borrowers tend to be offered the best rates by a lender.
We go into more detail on how a credit score affects a business loan in our article ‘What is a business credit score?’.
4) Staying in control
By financing your business with a bank loan, you can avoid having to give up any control to potential investors. With other types of finance, you may have to keep up a share of the company and divide any profits among the investors. While a business loan may be more expensive, the bank will not take a stake in the business, allowing you to keep control and all of the profits.
5) Decision-making freedom
Some lenders may try to restrict your business’s spending after the loan has been approved. This can be frustrating and potentially slow down your efforts to grow your business. However, a bank is unlikely to tell your company what business costs it can and cannot spend the money on. All lenders will place restrictions of one kind or another on a business, but a bank is likely to prioritise the loan repayments. If you can keep up with the monthly bills, a bank will usually leave you to make all the business decisions yourself.
The cons of bank loans
A bank loan will not be the right option for every business. Here are some disadvantages of bank loans to keep in mind when choosing a loan for your company.
1) Banks can be picky
Lenders are more likely to approve an application from an established, profitable business. This is because it represents less of a risk to lend to a company that has a good record of repaying debts on time. As a consequence, smaller businesses or startups are going to find it harder to get a loan with a bank. Big-name lenders can often afford to be picky with borrowers because of the volume of applications that come in. In the case that a smaller business is approved for a bank loan, the interest charged on the debt is likely to be higher than it would be for a bigger company.
Read our article ‘How to get a business loan’ if you need more information on the application process.
2) Lengthy approval process
High-street banks will often take time to consider a loan application, which can make the approval process longer than with an online lender. Applying for a loan will take a significant period of time in most scenarios, as you will need to prepare all of the information and documentation required by the lender. As a bank is likely to take longer to assess what you submit, it may not be the best option for a company in need of quick cash.
We have more details on what you need to apply for a loan in our article ‘Business loan eligibility: Who can get a business loan?’.
3) Spending plan
While a bank is unlikely to directly limit how your business spends the loan once it is approved, you will usually need to detail how the money will help grow your business as part of the application process. Growing the business will usually require you to increase revenue, which should make it easier for you to repay the loan. Therefore, the bank will want to see your future plans in detail before it hands out any money. This may make getting a bank loan more difficult if your business needs the money to cover short-term cash flow problems or day-to-day expenses.
4) Extra risk
While most business loans are unsecured, banks will also offer secured loans. Secured loans involve using a valuable asset as collateral, which can be sold to settle the debt if the loan is not repaid. This additional risk comes with the benefit of reducing the interest on the debt. The bank will usually offer a lower interest rate because a secured loan presents a lower level of risk to the lender compared to an unsecured loan.
Depending on the size of your business, the secured asset may be the property of the business or the personal property of a director or other individual involved with the business. In some cases, the lower interest rate will make a secured loan the best option, but for some smaller businesses it can add additional personal risk. Read our article ‘Secured vs unsecured loans: Which is best for me?’ to learn more about the key differences.
Other business funding options
If you find that the disadvantages listed on this page have put you off a business bank loan, there are some alternative options you could try.
Firstly, if you have recently launched your business or you are about to start a new company, you may be able to access the government-funded Start Up Loans scheme. This programme is designed for businesses that have been trading for 36 months or less. You can borrow between £500 and £25,000, to be repaid over one to five years at a fixed interest rate of 6%. We have more information on the government plan and other startup loans in our article ‘What are business startup loans?’. We also cover loans for small businesses in our article 'How do small business loans work?'.
Some businesses will not suit a standard business loan. It is worth considering that taking out a loan is not the only way to fund your company, so you could try a different type of financing if you think a business bank loan is the wrong option. Alternative options can include equity finance, crowdfunding, grants and personal borrowing.
Alternatively, your company could get a business loan from an online-only lender instead of a bank. There are many UK lenders that do not operate out of high-street branches or have official bank status. Without the overhead costs of big-name banks, these lenders are often able to charge cheaper rates to a wider range of businesses. It can also be a good option for businesses with bad credit, something we cover in more detail in our article ‘How to get a business loan with bad credit’. Your business will miss out on the advantages of business bank loans listed in this article, but online lenders are a legitimate alternative.
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