The Time and Cost of Business Loans
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UPDATED: Oct 10, 2012
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For many businesspersons and wishful entrepreneurs, business loans are a vital form of financing that aids in the maintaining or creation of a commercial entity. Commercial loans can even help fuel economic growth by leading to a national increase in jobs and commerce.
While many business loans articles discuss benefits of commercial financing, entrepreneurs should remember that, like all debt, borrowing can result in the loss of both time and money.
Commercial loans can be quite difficult to obtain. While applicants with fantastic credit ratings and excellent collateral can get approval for their financing faster than most, this is not the case for the majority of people. As many under-qualified applicants find out the hard way, applying for a business loan can be a waste of time.
Commercial financing involves a lengthy application process. This process can prove so costly to businesses that some applicants may end up going bankrupt prior to getting approved. Applicants must “jump through hoops,” in a manner of speaking, in order to convince some lenders that they are credible borrowers.
Many lenders prioritize current customers first. This means that new customers may find themselves facing a long wait and closer scrutiny. On the other hand, applicants who are long-time members of a bank would be wise to seek their financing there, knowing full well that their bank prizes their long relationship.
But business loan applications harbor more tangible downsides as well.
Perhaps more so than other types of debt, business financing can prove costly.
Many lenders will require collateral in order to give financing to a borrower. Applicants looking to obtain a large amount of money will be forced to offer up valuable collateral. In the event that this borrower fails to make payments and defaults, the lender can seize the offered collateral.
Giving up a percentage of a business’ ownership in exchange for a loan can prove detrimental to a company’s finances. This is especially true when an owner wishes to sell their company but must first obtain lender approval since many investors and lenders impose restrictions on companies they contribute to. Additionally, giving up a percentage of a business to a lender leaves less stock available for selling to other investors. These are important considerations that must be evaluated by applicants prior to borrowing money.
Often times, small business owners levy their house for financing. If that borrower defaults, he or she would then be left without a home. Adding insult to injury, a defaulting borrower would also see their credit score damaged for failing to repay a business loan.
Potential loss of collateral isn’t the only risk of taking on business debt.
The account fees and interest of commercial financing can be so costly that they often end up becoming financial burdens that sap company accounts of much-needed cash.
Despite their time and cost, business loans are borrowed and repaid every year. These financing tools help build the various industries and markets found throughout the country. Savvy entrepreneurs and ambitious businesspersons can obtain these loans and transform small and startup businesses into industrial titans that reshape our very world.