What is a Bank Loan: The Pros & Cons of Taking One
Updated: Aug 29
If you need money, the bank is an obvious place to turn. But are they always a good option? If you are considering taking a bank loan, you may have some questions. What are the pros and cons of taking out one? What kind of banks will give you one? What are the requirements for applying for one? These are all good questions and we'll try to answer them for you below. Let's get started!
What is a bank loan?
A bank loan is a type of financing that allows you to borrow money from a bank. You can use it to finance large purchases, such as a car or home, or small business start-ups. Bank loans can also be secured or unsecured.
A secured loan is backed by collateral (i.e., something of value that's used as security). The creditor takes possession of the collateral in case you default on your payments, which typically lowers the interest rate on your loan and increases its ease of approval. An unsecured loan means there's no collateral backing up the borrowed amount—interest rates are usually higher than those for secured loans because they carry more risk for creditors and lenders alike.
What are the pros of taking a bank loan?
There are several reasons why bank loans can be a good financing option.
Bank loans usually have lower fixed interest rates. This means you pay the same amount of money each month, regardless of how much you borrow or the size of your loan. If you get a $10,000 bank loan and make monthly payments, the payment could be around $400 per month until your debt is paid off (assuming an interest rate of 6% on a 30-year term). In comparison, if you get a $10,000 line of credit from a credit card at 18%, then every time you use that line to buy something, it will cost about $180 more than if it had been paid for with cash or debit/credit card.
Bank loans can be used to start or grow small business ventures. This can include buying equipment for your existing business or paying for the various operational requirements for running your new business.
Monthly repayments of bank loans are predictable. When you sign your loan agreement, you are made aware of the payment terms for your loan so there are no unnecessary surprises as you repay.
Bank loans help you build your business credit score. Business credit signals lenders and vendors your company's ability to borrow money and pay its financial obligations. As you fulfil your loan obligation by repaying on your scheduled dates, you are able to build your business' credit score granting you access to bigger loans in the future.
What are the cons of taking a bank loan?
You have to have a good credit score.
You have to fill out a lot of paperwork.
Default on your loan repayments can lead to a fall in credit score, which means that you may not be able to take out another bank loan again.
Bank loans usually require collateral, meaning that the lender can seize any property or asset(s) from you if you do not make payments on time or do not pay back the whole loan amount when it comes due.
What are the best uses for bank loans?
When it comes to bank loans, there are a number of ways you can choose to use them to support your business. You should ideally determine how much you really need to best meet your needs before applying for a loan. Below are some of the ways you can use bank loans
Working capital to run your business affairs
Real estate acquisition,
Acquiring a new business
Maintaining cash flow for your business
What are the requirements to take a loan from banks?
If you are applying for a loan at your local bank, it is important that you understand their requirements and make sure your business plan meets them. Here are some general requirements most banks have for applying for a loan.
You need to have a good credit score. If your company or personal credit score is low, then the odds of getting approved go down significantly. It's best to check this before starting up any type of business because it will impact how much money you can borrow and what types of interest rates apply. You should try to keep track of your personal finances as well so that they don't affect your ability to take out loans down the line when necessary!
You need a good business plan and idea (or two). Banks want proof that you know what it takes to run a successful enterprise--and this means more than just an idea on paper; they want evidence that there's demand for whatever product or service you're offering before investing large sums into anything potentially risky.
A solid personal resume. Traditional lenders often need documentation demonstrating the qualifications of those in charge of managing a business. Your resume and the resumes of other key team members like owners and executive officers will be part of that proof. This resume needs to be as strong, updated, and current as any other resume you've ever submitted to increase your chances of being considered for a loan.
What types of banks offer loans to small businesses?
Banks that offer small business loans include:
Community banks - these are community-based and owned by their customers. These banks may offer targeted loan programs for small businesses like yours.
Credit unions - are member-owned financial cooperatives that usually have more flexible underwriting standards than larger banks and can be a good place to start your search for a small business loan if you do not have the best credit history or collateral to secure the financing you need.
Regional banks - serve particular geographic areas and may have less stringent requirements than national lenders when it comes to lending decisions.
Bank loans can be a great way to get the funding you need for your business. They are not too difficult to apply for and can be faster than other forms of financing if you have all the requirements in place. We hope this article has given you some insight into what bank loans are all about so that if you ever do decide to take one out yourself (or recommend them to someone else), it will be with more knowledge and less fear!
If you would like to learn more about other financing options available to Black women entrepreneurs such as grants and debt-free loans, and how to easily access them, be sure to enroll in the Blaze Business Intensive Course where you will learn all these and so much more to take your business to the next level! Click the button below to learn more about the course and sign up today!