If your business is still young and growing, it is likely you won’t have sufficient capital to nourish its growth so it may achieve its whole potential. These can be the cases when you might want to explore the options regarding financing. One of these options is bank borrowing. It is quite popular and has been around for so long since capitalism has existed. Whether you prefer banks or the best money lender singapore, it is necessary you’re mindful of what exactly the benefits and pitfalls of borrowing money from a bank.
Advantages
It allows you to make large purchases.
Large purchases, especially ones that are important to your business, become unavoidable at some point. A bank can help in such cases. Some of the items that can be purchased with the help of a bank are vehicles, land, and machinery. This is where banks offer a great advantage because, without them, it would not be easy for many people to start or expand a business. For all of them, it might even be completely impossible.
Keeps your money in business.
Usually, when you choose to get financing from a bank, the bank doesn’t let you know exactly what you’re going to do with that money. This is one of the highlights of the importance of borrowing. With many forms of financing, such as loans from non-bank institutions, there is a certain amount of influence on the process of running your business. From time to time, you would have to give up some of your ownership in the business to get the funds.
Credit improvements.
Another advantage of borrowing money from a bank is that, depending on your debt situation, you can actually improve your credit in the process of taking a loan from a bank. If you choose a long-term loan from a bank and meet all your obligations on time, your credit score will improve over the life of the loan. In case you end up paying the entire loan on time and without a late payment, your credit score will actually improve.
Disadvantages
You risk foreclosure if you can’t repay.
A bank will not take over your business when you get the financing. However, depending on how the contract is drafted, you risk the lender foreclosing on your business if you don’t pay the loan. Most business loans are secured, which means something is backing the loan, be it collateral or a guarantee. If you apply for a secure loan by collateral, then the bank can claim some asset of yours or your business in the event that you cannot repay the loan. In the most extreme cases, the bank can take over your entire business.
High interest rates.
When taking a loan from a bank, there is always the possibility that interest rates will increase over time, especially if you have chosen an adjustable-rate loan. This can make the loan difficult to repay. There is also the possibility that the details of the loan will change over the period, which can be detrimental to your business. It has been seen that many banks impose stricter requirements and covenants on business loans when the business is going through a period of collapse.
It could ruin your credit.
Your credit history is an important factor that the lending institution takes into account when deciding whether or not to grant you financing. You don’t have to worry about your credit score when exploring other sources of financing, such as equity financing, but it is one of the most important aspects of debt financing. If you have a good credit score, your loan application is more likely to be accepted and you will get favorable terms. On the other hand, a poor credit score can make you unattractive to most banks and make it difficult to find financing.