Bank Loan : Introduction, Pros & Cons – Essay, Speech, Composition
Introduction to Bank Loan
Bank Loan Essay :Banks are very useful loan provider for the small scale businesses. Banks provide loans at a lower cost than most other financial institutions. Banks usually ask for strong credit scores, collaterals, personal guarantees or healthy financial statements so as to sanction loans to the business concerns. It takes serious of effort for a business entity to get loan sanctioned from a bank and also it requires a substantial amount of time for this. The loan sanction process may take as much as three months time.Bank loans are utilized by a business to invest in capital assets or inventories or for the purpose of meeting the working capital requirements. Bank loans are a reliable method of financing businesses of small and medium size. The covenants of a bank loan may be strict. A business house has to consider both the benefits and drawbacks of bank loan before opting for it.
Pros Of Bank Loan (Merits & Advantages, Benefits)
1) Interest on a bank loan is a tax deductible item. Interest on a bank loan is a permissible item of expense in the Income Tax Return of a business or a nonprofit making concern.
2) A bank which provides loan to a business concern is a creditor of such entity. Bank loan is an item of liability and not an equity for the borrower concern. Therefore, a lender bank does not have any share in the ownership and management of the affairs of the borrower.
3) When an entity takes loan from a bank, it opens up the scope to develop good professional relationship with the bank for the borrower. This enables the borrower to borrow further loan in the future with less hassles.
4) In case of bank loan with fixed interest rates, the installments payments remain the same. This helps the borrower in budgeting. Even if rate of interest in variable, it is easy to compute future loan servicing payments for the borrower by the help of spreadsheets.
5) Bank loan is available for diverse uses. It can be used to finance purchase of a machinery or for purchasing raw materials. It can also be used to invest in the working capital of the business.
Cons of Bank Loan (Disadvantages, Drawbacks & Demerits)
1) Sanctioning of bank loan is associated of lengthy paper work. This can be very frustrating for the organization seeking loan. Loan procurement process requires enormous effort and plenty of time of the borrower which to some extent affects the daily operations of the same.
2) A person or entity seeking loan from a bank has to wait for a substantial amount of time to get it sanctioned. This results in disturbing the business affairs of the borrowers.
3) Most of the banks demand collaterals from the borrowers against the loans sanctioned. This may not have much of an impact on an established organization but it does makes loan procurement difficult for a small scale business or a start up.
4) The borrowers may be demanded to provide personal guarantees. This means that the personal assets of the same can be seized by the bank in the occurrence of failure of the business to repay the loan partially or as a whole.
5) Interest rates on bank loans may be affordable for the mid size and large scale business units but for small scale business concerns it may be unsuitable. Payment of installments of a large amounts affect the liquidity position of a small size business as it makes the business operations difficult to run.
Conclusion on Advantages and Disadvantages of Loan
A business entity can raise financial resources by various ways. For a corporate organization equity capital is very suitable. For a company of high credit worthiness debt financing can be a means to procure finance. Venture capital financing is the most suitable for the start ups. But, for any organization whether operating at a small scale or large bank loan is a convenient means of financing. It also doesn’t matter whether the entity is a start up or growing or an established one, loan from a bank can meet its diverse business needs. Although, generally, a bank loan is associated with many drawbacks, but one also needs to emphasize on its benefits as well.