Risk of Business Loans
Business loans are tools used by companies to fund investments and visions. Securing
funding provides a business with the growth they need to expand. As a business owners, it
is essential that you understand how to get into and out of a loan. Planning goes a long
way in business loans, ensuring you are fully aware of the risks involved.
There are some risks that as a business owner you need to be aware of before you
choose a business loan, these include:
It's not uncommon for business owners to use their credit to guarantee a business loan,
this is common with small and new businesses, who may face the problem that they have
not built up a credit history. This means the owner must use their own personal information
and sign the documents to state that should the business not be able to repay the loan,
they are responsible.
This is exceptionally risky, as should the business have any problems repaying the loan, it
shows on the owners personal credit records and it means that the owner is held liable for
the repayments. This also makes it harder for the business owner to secure credit in the
future in their own personal capacity.
In some instances a business loan will only be granted when the business has collateral to
secure the loan, which is assets. Assets that can be used includes land, real estate,
equipment and account receivables.
This is also a major risk of a business loan as the lender can take ownership of the assets
if the loan is not repaid according to the contract signed. Business equipment may be
essential instruments which create the business cash flow, which are taken by the bank if
not repaid. Taking away essential equipment makes it hard for the business to operate.
Fluctuations in Interest Rates of Business loans
One of the risk of business loans, is that based on the loan type selected, the business
may have to pay back the loan, along with interest. While this is the normal way in which
loans work, the interest repaid is determined by the type of loan selected. Fixed rate loans
are a set amount of interest, which are set over the period of the loan, while variable rates,
means that as the interest rate varies, so does the repayments.
The risks associated with fluctuations in interest rates are seen when choosing a variable
loan, which can result in higher monthly repayments and cause repayment problems.
Fixed loans, while you may pay more, are the best option, making budgeting easier.
Defaulting on a Loan
Not paying the loan or being late on payments is a serious risk when it comes to business
loans. It is never a good sign when a business struggles to repay their monthly loan
premiums. If not paid, this can bring new loans or service problems in the future. Defaulted
loans also follow the company and owners, making it harder to secure credit in the future.
The risks include the possibility of assets being seized, the owners personal credit and
assets being at risk and problems securing credit in the future.
Too Much Debt
The final risk associated with business loans is the risk of having too much debt. Many
businesses are able to obtain a number of loans at the same time, but just because you
can does not mean it is the best option for your business.
Loans that are repaid and then a new one is obtained, reduces risks and helps a company
develop a good credit history. But when a loan is taken to repay another loan, this is the
sign of monetary problems and does not look good when applying for further credit from
lenders and suppliers. A business that borrows money on a regular basis, questions
whether they are actually making a profit and whether they have a positive cash flow
balance. It also raises red flags on the management skills of the business.
When a business takes out a business loan, it is usually to expand, grow and make more
money. Constant borrowing shows that they don’t have the capacity to make money and
have made bad decisions which are costing them greatly in the long run.