Advantages and disadvantages of bank loans
A loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest.
Loans are generally most suitable for:
- paying for assets - eg vehicles and computers
- start-up capital
- instances where the amount of money you need is not going to change
The terms and price of loans will vary between providers and will reflect the risk and cost to the bank in providing the finance. For larger sums, the pricing and terms may be negotiable.
Banks will loan money to businesses on the basis of an adequate return for their investment, to reflect the risks of defaulting and to cover administrative costs. If you have an established relationship with your bank, they will have developed a good understanding of your business. This will help them to advise you about the best product for your financial needs.
Different types of bank loan include:
- working capital loans - for short notice or emergency situations
- fixed asset loans - for buying assets where the asset itself is collateral
- factoring loans - loans based on money owed to your business by customers
- hire purchase loans - for long-term purchase of assets such as vehicles or machinery
