What Are The Advantages Of Non Bank Loans

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Advantages & Disadvantages of a Bank Loan

Advantages & Disadvantages of Bank Loans

Whether you are planning to start a business, buy inventory for an existing one or expand operations, you probably need a substantial amount of money. If you don’t have the money lying around, you’ll need financing. One of your financing options is to secure a bank loan. These loans offer certain tax breaks and have lower interest rates compared to credit cards and overdrafts. However, you must meet a range of loan requirements and the burden of repayment can wear you down.

Bank Loan Advantages

Flexibility: With bank loans, you only need to worry about making your regular installment payments on time. This is an advantage over overdrafts, where you must pay the full amount when the bank demands it. In addition, banks don’t usually monitor how you use your loan as long as you make your payments on time, so you can invest it however you deem fit.

Cost Effective: In terms of interest rates, bank loans are usually the cheapest option vs. overdrafts and credit cards. According to Bankrate, as of October 2020, the average fixed interest rate for credit cards has surged to 17.49 percent, while certain bank-provided loans guaranteed by the Small Business Administration have rates ranging from 7.5 to 10 percent. The lower interest rates of bank loans will definitely save you money.

Retained Profits: While businesses that issue equity to raise capital often give a percentage of their profits to shareholders, banks require borrowers to pay only the principal and interest amount on a loan. As such, you will retain all your business profits.

Tax Benefits: When you use a bank loan for business reasons, the interest you pay on the loan is a tax-deductible expense. For example, if you are paying a 5 percent interest rate on a $30,000 loan, then your yearly interest is deductible on your 1040 Schedule C tax form.

Bank Loan Disadvantages

Strict Requirements: Because many bank loans require some form of collateral, startups and existing businesses without any assets can find it difficult to get their loan applications approved. If these borrowers choose to go for unsecured loans, they are hit with higher interest rates.

Repayment Burden: Loan borrowers must make periodic payments to their banks. Those who fall behind on payments face the prospect of having their assets seized. Even if you manage to make late payments, your bank could still report you to credit bureaus – a move that negatively affects your credit score. With a lower score, obtaining loans in the future becomes more difficult. The repayment burden is a disadvantage compared to raising money through shareholders, because shareholders don’t require regular repayments. Instead, they are typically paid dividends only on profits.

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Irregular Payment Amounts: If you get a bank loan with a variable interest rate, the rate changes with market conditions. This makes it difficult to determine the exact amount of future payments. Consequently, it becomes challenging to make sound financial plans.

Bank finance

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

Advantages of term loans

  • The loan is not repayable on demand and so available for the term of the loan – generally three to ten years – unless you breach the loan conditions.
  • Loans can be tied to the lifetime of the equipment or other assets you’re borrowing the money to pay for.
  • At the beginning of the term of the loan you may be able to negotiate a repayment holiday, meaning that you only pay interest for a certain amount of time while repayments on the capital are frozen.
  • While you must pay interest on your loan, you do not have to give the lender a percentage of your profits or a share in your company.
  • Interest rates may be fixed for the term so you will know the level of repayments throughout the life of the loan.
  • There may be an arrangement fee that is paid at the start of the loan but not throughout its life. If it is an on-demand loan, an annual renewal fee may be payable.

Disadvantages of loans

  • Larger loans will have certain terms and conditions or covenants that you must adhere to, such as the provision of quarterly management information.
  • Loans are not very flexible – you could be paying interest on funds you’re not using.
  • You could have trouble making monthly repayments if your customers don’t pay you promptly, causing cashflow problems.
  • In some cases, loans are secured against the assets of the business or your personal possessions, eg your home. The interest rates for secured loans may be lower than for unsecured ones, but your assets or home could be at risk if you cannot make the repayments.
  • There may be a charge if you want to repay the loan before the end of the loan term, particularly if the interest rate on the loan is fixed.

When loans are not suitable

It is not a good idea to take out a loan for ongoing expenses, as it may be difficult to keep up repayments. Ongoing expenses are instead best funded from cash received from sales, possibly with an overdraft as backup.

If you cannot obtain a loan or other type of finance from your bank, there are other finance options available to you. For more information, see business financing options – an overview.

If you believe that a bank loan may be a viable option for your business, see prepare your business for bank financing.

Types of loans: bank loans vs non-bank loans

Times change. In the past, if you needed a loan for your small business, the only choice was to go to a traditional bank. Nowadays, there are innumerable sources of financing and different types of loans for entrepreneurs.

If you have problems with your cash flow , you need to buy equipment , or you simply want to expand your business, a loan is the best way to get the cash you need .

But do you know what all the options available in the market are?

This article will help you understand the difference between bank loans and non-bank loans. In addition, we list the advantages and disadvantages of banks and alternative lenders, and the types of loans each offer.

Types of loans: Bank loans

A bank loan is an amount of money that banks lend to small businesses.

To access a bank loan you must meet certain conditions, such as the repayment time, interest rates, and the amount of each payment.

Banks generally ask borrowers for collateral, such as business assets, or sometimes the personal property of the owners.

Banks offer several types of loans, which can be classified as secured or unsecured, depending on whether or not the bank requires collateral to grant them.

All these complexities make choosing the most convenient loan for your business somewhat overwhelming.

Knowing the different types of loans offered by banks and understanding their conditions will allow you to more easily choose the right one for your small business.

These are the most common types of loans:

Lines of credit

With this form of financing, banks offer entrepreneurs funds to meet the cash needs of their businesses whenever they need it.

These lines of credit are commonly offered in the form of checkbooks, cards, or withdrawals directly at the bank.

The credit lines are renewed periodically, from 90 days and up to several years. Its amount varies depending on the financial institution but can range from $10,000 to several million dollars.

One of its advantages is that you only pay interest for the amount of money that you used, and not on the total funds.

Credit cards

Credit cards are an alternative to lines of credit, as they allow entrepreneurs to quickly access a limited amount of money that can be used as working capital.

Although their interest rates are high and have limits of around $15,000, they offer certain benefits, such as hotel discounts, car rental and gas; travel insurance, and extended warranties for certain purchases.

Installment loans

Installment loans are the most common source of financing for small businesses and can be short and long term.

Short term loans. They are paid during a period of up to 18 months, and interest is charged on the total debt.

Long term loans. They are paid during a period that goes from three to 25 years, and the company’s assets serve as collateral.

Financing through leasing

Leasing is another form of bank loan. Under this figure, banks lend money to rent equipment, vehicles, or real estate. The duration of the loan depends directly on the term for which the assets are leased.

SBA Loans

The Small Business Administration offers different types of loans through banks and other entities. SBA programs are designed to meet different financing needs of small businesses.

These loans are guaranteed by the SBA, as it agrees with the bank to cover the debt if the borrower fails to meet the payments.

Advantages and disadvantages of bank loans

Bank loans are one of the most popular sources of financing among small business owners. Luckily, the approval rates for small business loan applications increased during the of July.

In large banks, the increase amounted to 27%, and in small banks, it exceeded 50%. These figures, added to the Federal Reserve’s announcement regarding the decrease in interest rates , currently make applying for a loan and getting it approved seem like a real possibility for small businesses.

But to make a well-informed decision, you must be sure that this is the most appropriate solution for you. Knowing the pros and cons of bank loans will help you decide:

Pros of bank loans

  • Lower interest rates. Banks can offer lower interest rates when compared with other lenders.
  • Personalized attention. In a bank, you can interact face to face and receive advice from a finance expert. Similarly, applying for a loan in a bank where you already have an account can ensure you better terms and greater access to specialized care.

Cons of bank loans

  • Approval time. The main disadvantage of bank loans is the long and expensive approval process. It may take several weeks before receiving a response from the bank, and even longer before receiving the funds.
  • Higher costs. Traditional banks charge higher fees, as they have to cover the expenses generated by their offices and branches. Besides, they can charge you just for requesting the loan or charge a fee known as the origination fee, which covers the costs involved in processing the application.
  • More requirements. Not only must you gather a lot of documents, but you need to meet other requirements. For example, you must attach to the application a business plan , show that you have assets that serve as collateral , and of course, have a great credit score .

Types of loans: Non-bank loans

Non-bank loans are granted by financial institutions that operate differently from traditional banks.

Also known as alternative lenders or online lenders, these entities obtain their funds from banks or investors.

In the last decade, we have witnessed the rise of these institutions due to the digital technologies, the growing disenchantment with traditional banking, and the variety of financial solutions offered by these institutions.

Alternative lenders have different types of loans, which can be more attractive to small business owners than those offered by banks.

These are some of the loans they can offer:

Loans and microloans

These are of the most popular alternatives among entrepreneurs. They work similarly to those offered by banks, with a set time to make payments, a fixed number of fees, and a variable or fixed interest rate, depending on the conditions of the loan.

Also, these types of loans are granted in the short, medium and long term, depending on the lender.

Credit Lines

This financial product allows you to withdraw funds to capitalize your business when you need them. When you pay the money with interest, you can withdraw again. They are mainly used as emergency funds, as working capital, and to buy inventory.

Equipment Loans

With these types of loans, you can finance up to 100% of the purchase of office equipment, machinery, vehicles or tools necessary for your business. An advantage is that the same equipment serves as collateral for the loan.

Invoice financing

These types of loans allow companies to access funds equivalent to a percentage of the value of outstanding invoices. Unpaid invoices serve as collateral for the loan. These resources will allow you to cover operating costs while your customers pay you what they owe you.

Merchant cash advances

Through this form of credit, alternative lenders provide funds to companies in exchange for a portion of their future sales. Payments are made daily or weekly through debits from the business bank account or credit cards. Although it is easy to access these advances, your interest and fees are excessively expensive.

Advantages and disadvantages of non-bank loans

For small businesses, one of the main reasons to go to an alternative lender is the high probability that their application will be approved, as well as the speed in receiving the capital.

These are the pros and cons of alternative lenders:

Pros of non-bank loans

  • Fast approval process. Thanks to technology, alternative lenders have been able to simplify the application process. Applying for a business loan from a computer or smartphone can take just a few minutes. Online lenders can evaluate your application in no time. If approved, the funds may be available in less than 2 days.
  • Less strict requirements. For alternative lenders, a low credit score is not an obstacle to approving a loan. Nor do they require too many documents. They are also much more flexible in terms of collateral, as in certain cases it is not necessary. And if you pay in advance, you will have to any early payment fees.

Cons of non-bank loans

  • Very high interest and additional fees. The interest charged by alternative lenders can be high. This is because they have to resort to the funds they get from investors or banks, which increases the costs of the loan, and of course, interest rates.
  • Less favorable conditions. For starters, the deadlines for paying money can be much shorter than those offered by traditional banks. Depending on the business, is possible that having to make fewer payments is a disadvantage.
  • Limited customer service. You cannot always speak face-to-face with the representatives of an alternative lender.

To bank or not to bank? That is the question

Getting financing for your small business is easier today more than ever. The alternatives are countless and there are many types of loans available, but you should research and choose the most convenient option for you.

A traditional bank can offer you a loan with very good terms, low-interest rates, and greater resources to capitalize on your company. But you will need a high credit score, enough time in operation and a lot of patience.

If you do not meet these requirements, an alternative lender is not so demanding, they have a much faster process and can deliver the funds to you in no time.

To get a loan from Financial Camino, you only need to have been operating for 9 months and generate monthly sales of $2,500. You can apply for loans of up to $400,000 or microloans of up to $75,000, plus you can receive the money in up to 2 days.

At Camino Financial we live up to our motto “No Business Left Behind”, and we offer the best financial alternatives that will help you achieve your dreams. Apply for a small business loan today !

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