Risks of taking a business loan

As a business owner, you’re always looking for a way to expand your operations and grow your bottom line. Getting the right financial backing can make all the difference when it comes to your company’s future. But what’s the best way to get the funding you need?

Getting a bank loan is a traditional approach to get extra funds for your business. Bank loans have some definite advantages, but they also carry a number of risks. There are other, risk-free approaches — like taking out a small business loan from Total Merchant Resources — that may work better for your business. 

Not sure what’s right for you? Keep reading to learn about the pros and cons of bank loans, as well as the risks of taking a bank loan.


What Are the Advantages of Bank Loans?

Bank loans carry risks, and that’s why many business owners are choosing other approaches to get financial backing. Still, it’s important to be aware of the advantages of bank loans. After all, there’s a reason they have remained so popular over the years. Here are a few of the benefits associated with taking out a bank loan.


You’ll Get the Funds You Need to Grow Your Business

If you qualify for a bank loan, you’ll get the money you need to expand your business operations. You’ll be able to take advantage of all of the opportunities that come your way, without waiting for your business to reach the right size on its own. This is useful if you’re expanding into new markets or hiring new employees.

What to Watch Out For

If you do decide to take out a bank loan, be aware that you are running a major risk. If you are unable to make your monthly payments, your credit score will probably suffer. You could even face legal action, or have your paycheck garnished.

There are a number of possible solutions for businesses seeking extra funds. Bank loans are not the only option for businesses in the process of expanding.


You’ll Maintain Control of Your Business

Some people feel that bank loans will give them the freedom to run their business as they see fit. After all, the bank won’t get involved in the day-to-day operations of your business. You also won’t need to pay out dividends the way you would if you sold stock to investors.

What to Watch Out For

When you apply for a bank loan, you will need to present a detailed business plan. You’ll need to show that you have business experience, and you’ll also need to convince the bank that you’re capable of running a profitable company. 

There are a number of other funding options that allow you to maintain full control of your business without having to answer probing questions about your financial history. 


You May Qualify for Favorable Interest Rates

If you qualify for a small business bank loan, you may be able to get favorable interest rates. Federal Reserve data shows that average business loan interest rates range from 2.54% to 7.02%. If your business meets the bank’s standards, you may qualify for the lower interest rates. 

What to Watch Out For

Many small businesses may not qualify for low interest rates. If the bank feels your business is risky or unproven, then you may end up with no loan at all. If the bank does approve your loan, you may have a sky-high interest rate.

If you end up with high interest rates, you could end up struggling to make your monthly payments. That increases your risk of defaulting, which could lead to legal issues and major financial problems.



What Are the Disadvantages of Bank Loans? 

Bank loans have a number of built-in disadvantages and risks. Here are a few of them.


Bank Loans Have a Complicated Application Procedure

Applying for a bank loan is a lengthy and complicated process. The applications require extensive paperwork and documentation. The process also requires interviews with bank staff, who may ask questions about your business plan, your long-term goals, and your experience. 

It could take weeks or even months to be approved for a bank loan. That makes this process challenging for businesses that need to get funds quickly. In fact, waiting around for a loan could make it difficult for you to meet your financial goals.


Many Businesses Are Turned Down for Bank Loans

Unfortunately, banks often turn down applications for business loans. If you are a small business owner or if you’ve just launched a start-up, it can be especially hard to get approved.

Banks prefer to lend to businesses that have a high business credit rating and may also look at the owner’s credit score. They want to see how long the business has been in operation and how successful the business has been so far. 

If your business is new, or if its success doesn’t meet the bank’s standards, then your loan application may be declined. That means you could end up wasting time and effort on an application that doesn’t get approved.


You Face Consequences If You Can’t Make Payments

If you are approved for a bank loan, you’ll need to make monthly payments on the principal and the interest of the loan.

If you are unable to make those payments, you will face serious consequences. If you secured your loan with collateral, like your home or your vehicle, they could be seized for nonpayment.

You could also face legal action, which could result in having your wages garnished. And your credit score will take a major hit if you’re unable to make your payments on time.



Alternatives to Bank Loans

Bank loans are risky, but there are alternative ways to finance your small business.

Government loans, like the loans provided by the Small Business Administration, can be a good choice for some business owners. Personal loans may also be a good option. And credit cards can also help new businesses grow and expand.



Risk-Free Solutions from Total Merchant Resources

The right, risk-free loan for your business may be closer than you realize.

Total Merchant Resources offers small business loans and lines of credit that can help any business reach its maximum potential. TMR doesn’t require a lengthy application process, and the credit requirements are in line with small business reality. There are also no hefty monthly payments.

Visit us today to learn what TMR’s risk-free funding options can do for you.