What Is the Downside of Small Business Loans?
Most small businesses need outside financing for start-up purposes or expanding their current operations. The traditional method of business financing comes from bank loans, which have several downsides for small businesses.
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Down Payment
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Most banks require small businesses to have a certain percentage of owner's equity invested in the business prior to the loan approval. Owners can provide a down payment on the loan to meet this requirement.
Loan Terms
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Small businesses may not be able to obtain the best loan terms, i.e., interest rate, loan length or repayment terms. Banks may use a standard loan package for small businesses to ensure that they can recoup their loaned money.
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Collateral
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Depending on the type of small business, banks may require collateral for their business loans. Machinery or buildings purchased with bank loans may not be suitable collateral if they are used in specialized operations and have limited market value.
Cash Flow
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Bank loans create high levels of fixed debt payments to the bank, restricting a company's cash flow. Newer businesses may struggle with high debt payments since their cash flow is considerably less than established businesses.
Debt Level
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Vendors and suppliers that extend commercial credit to businesses do not like to see high levels of outstanding debt in a small business. Most businesses repay their bank debt first to avoid blemishes on their business credit, pushing back vendor payments.
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