What Are The Advantages And Disadvantages Of Bank Loans

Good Essays
Bank loans
1. Advantages
Firstly is tax and interest rate advantage. Normally, the interest of loans from banks does not need to pay tax. At the same time, the interest rate usually remains constant through the process of loans, which means the payments during this period are the same. It is more convenient for enterprises to generate a budget plan and estimate the period payments. Sometimes the interest rate is adjustable during the loan, however, shareholders can use software to calculate future payments based on the change of rate. (John DeMerceau)

Secondly, the bank is separate from ownership. Different from stock, banks have no rights to manage your company. After providing a loan, banks will not be included in operating and regulating
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Advantages
First of all is the speed of funding. The fact is, the time it normally spends on processing the loan is one to three weeks. It is faster than the bank, which could take more than one month, based on the amount of loan. For example, small loans may take few days to be funded. Especially for new entrepreneurs, time is precious when they need money. (Brett Child, 2011)

Secondly is less cost of loans and lower interest rate. For instance, if company borrows money through Prosper (a P2P platform), they only charge origination fee to process the loan. On the contrast, banks will charge different kinds of fees, like transaction fee and security fee. (Laura Woods, 2015) Contrary to bank and credit cards, P2P provides lower interest rate.

Thirdly is Flexible. Banks focus more on company’s’ credit history, if the business got a bad credit history, it is likely that bank will reject the loan requirement. However, the enterprise has another chance to explain their “dark history” with some good reasons. This chance increases the possibility that lenders are willing to lend money to the company. (Laura Woods,
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It is not only convenient but also easy. The only things that they need are Internet access and related company information. Compare to the bank, P2P saves more time on processing the application. In reality, the application can be approved within hours. (Brett Child, 2011)

2. Disadvantages
Firstly is credit score and interest rate. Although the business has chance to persuade lenders to lend money to them, the interest rate will still be based on credit score. If the company has terrible credit, P2P may refuse the loan requirement, or give higher interest rate. At the same time, ignore the payment would also influence you credit rating badly just same as banks. The entrepreneur must take it seriously. (Better Business, 2014)

Secondly is repayment period. Typically, P2P limited the payment period between 3 and 5 years. It is a short period and implies that cash flow for each period will be increased. Therefore, the business will burden more pressure from loan payments in case they don’t have good liquidity of cash flows.(Better Business, 2014)

Thirdly is lacking of regulation. Although there are many large P2P platforms operated maturely, they still not monitored by any agency or government. The potential risk has existed for

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