Each entrepreneur needs to maintain positive working capital to fund day-to-day operations efficiently. The positive working capital further helps the business to meet short-term financial obligations on time and avoid negative cash flow situations. The entrepreneurs can meet working capital needs by accessing credit through a number of options. Business loans are one of the most preferred options to access short term finance. The unsecured business loan products enable entrepreneurs to avail lump sum credit to meet varied financial needs.
The entrepreneurs still have option to choose from a variety of business loan products. The repayment period and interest rate vary from one type of business loan to another. Also, the eligibility criteria for same type of business loans may also differ from one lending institution to another. But a large percentage of business owners prefer business loans to other forms of credit because of the advantages of a business loan as compared to other options. There are also a number of reasons why business loans are one of the most preferred financing options for small businesses and startups.
Advantages of a Business Loan: 5 Reasons Why Entrepreneurs Prefer Business Loans to Other Financing Options
1) A Wide Range of Business Loan Products
An entrepreneur has option to choose from different types of business loans. Some of these business loan products are secured, whereas others are unsecured. Some business loan products like term loans allow borrowers to avail credit at fixed interest rate and repayment schedule. At the same time, technology-driven business loan products like POS-based loans enable entrepreneurs to repay the loan through multiple options – daily percentage instalment or daily fixed installment.
2) Differential Repayment Options
The term loans require borrowers to repay the debt based on a predetermined repayment schedule. Hence, it becomes easier for the entrepreneurs to avoid negative cash flow position by forecasting interest and EMI payments precisely. At the same time, the technology-driven loans provided by certain non-banking financial companies enable borrowers to choose from multiple payment options according to the liquidity and cash flow position of their businesses. Hence, it becomes easier for entrepreneurs to repay the debt in a flexible way by choosing the right business loan product.
3) Option to Negotiate for Favourable Lending Terms
Normally, the eligibility criteria for business loans differ from one lender to another. But most lending institutions determine interest rate based on credit risk associated with the business loan. Hence, an entrepreneur can easily negotiate for lower interest rates and extended repayment period if he meets the eligibility criteria set by lenders. They can even negotiate with favourable terms of lending by maintaining a positive cash flow position and excellent personal credit score.
4) No Need to Use Assets as Collateral
Often entrepreneurs find it difficult to avail conventional business loans without using personal or business assets as collateral. But many NBFCs and fintech companies nowadays provide unsecured credit to business owners based on real-time business data. For instance, the entrepreneurs can opt for Point of sale finance to avail credit based on the monthly sales routed through EDC terminals. Likewise, they can avail credit quickly by discounting their unpaid invoices and good received notes with a new-age lending institutions. The new-age lending institutions and platforms even launch innovative business loan products to meet varied working capital needs of small businesses and startups.
5) No Need to Sacrifice Business Share
The entrepreneurs can use the business loan proceeds to meet varied financial needs of their businesses. The credit will help them to fund their day-to-day operations as well as sustain growth in the long run. However, no business loan product required business owners to provide with the lending institution with a share in the business. Likewise, the business owners are also not required to share profits with the lending institutions. Hence, business loans enable entrepreneurs to run and grow their business without sacrificing ownership and control.
On the whole, a large percentage of small business and startup owners prefer business loans to other enterprise credit options. But several studies suggest that small business owners often find it difficult to avail business loan quickly and conveniently. That is why; many business owners opt for alternatives to conventional term loans – invoice discounting, equipment financing, business lines of credit, business credit cards, and POS-based loans. They even prefer non banking financial companies (NBFCs) to nationalized and private banks to avail credit on time. The business owners need to avoid certain mistakes when applying for business loans.