The loan consists in requesting from a credit institution a sum of money for a predetermined period and at a predetermined rate. The SME loan is reserved for merchants, craftsmen, companies with less than 80 million dollars of turnover and liberal professions. It has undeniable advantages. But, as in everything, there are consequences that should be taken into account. Here are the advantages and disadvantages of a small business loan.
Benefits
You finance your project without losing control of it
By taking out an SME loan, you do not give up your rights to your project. This is one of the major advantages of SME loan financing. Taking on debt rather than having investors take a stake in the company, for example, allows the entrepreneur to guarantee ownership of his company. He remains and remains the only master on board by keeping an absolute power of decision.
An SME loan is not included in the company’s equity, but rather in the financial debts. It is an external financing and the organization that grants the loan does not interfere in the management of the company. It only lends money. The borrowing company must repay the money on the basis of a schedule defined beforehand between the parties.
You can fuel your growth
You can take out a small business loan to finance any investment or cash flow requirement other than short-term ones. It is thus possible to take out this loan to finance investments, stocks or even a VAT credit.
Taking out this type of loan, which is long term, provides your business with the working capital it needs to operate at its best and be profitable. This additional debt could be seen as an opportunity to go further in your project and have more impressive results.
You are entitled to tax deductions
A no less important benefit of debt financing is the possible tax deduction. Since the payment of the principal and interest on your debt is classified as a business expense, it can be deducted from your business income taxes.
Consider the impact of the debt on your tax liability. It is possible that the borrower can deduct the amount of his loan interest from his professional expenses. In concrete terms, the financial interest is deductible from the taxable income. Thus, the debt generates a tax saving on the profit according to the tax rate of the company.
You strengthen your credit history
Many businesses fail to take off due to lack of financing or insufficient operating capital.
Building a positive credit history is essential if you are looking for long-term, low-cost debt financing. Small business loans allow you to build up your company’s credit history, which is a crucial and major advantage for taking out a larger loan in the future.
A good credit history reduces the need to rely on your personal contribution or other costly business financing options. It can also help you obtain more favorable credit terms.
You benefit from relatively low interest rates
Taking out a small business loan is often a more attractive alternative to personal loans, credit cards, short-term loans and other debt financing. The latter usually have very high interest rates and are therefore not necessarily advantageous. Do not hesitate to compare the different rates offered.
In all cases, the loan costs the company much less than a lease or a financial rental. In the latter case, the three-way relationship generates additional costs.
Disadvantages
The other side of the coin should not be overlooked, however. Although the SME loan has undeniable advantages, as mentioned above, it is important to keep in mind that the lending institution is a company whose business is to finance the economy.
You need guarantees
A guarantor is an essential part of the borrowing world. It is an additional form of security that can be used to assure the lender that you have a second source of loan repayment.
When an asset can be sold by the lender for cash, it is considered collateral. The same is true for items such as equipment, buildings, and in some cases inventory.
A good bond reduces the risk to the lender and is required for many types of loans. The amount of security required is usually tied to the amount of the loan. Often, the security is not well received by borrowers.
Interest rates can be high
Unfortunately, you may fall victim to some predatory lenders who will play on your vulnerability and need for capital.
While this is obviously not unique to debt financing, you should be aware of it. Look for a lender that is transparent and will give you honest numbers.
You have to pay back your debt
Even if your business goes bankrupt, you will have to pay your creditor. This is quite normal and the rules are quite clear on this point. The loan must be repaid according to the terms agreed upon. So you have to make the payments even if you’ve gone bankrupt. In any case, most lenders require that you guarantee the loan. This means that they could use your assets to pay off your debt.
The SME loan does not finance all expenses
It would be difficult to generalize, but according to the practice of the lending institutions, we note that they favor the financing of durable goods. They finance the purchase of vehicles, computer equipment, machine tools, etc. However, they are more reluctant to finance the capital needed to finance the activity itself.
Therefore, working capital requirements are generally not financed by lenders in the context of an SME loan.
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