Naturally, when you are planning to start your own small business, you have to plan on applying for a small business loan. Before you do, you need to make sure that you understand the pitfalls that come with actually receiving a small business loan and the possible effects that it can have on you and your new business. Of course, these SBA loans can help get your new business started, but all good things come with their disadvantages.
What Are Some Disadvantages?
The first disadvantage is the fact that you typically do not have any equity. Unfortunately, with a startup business loan, you cannot access the amount you have paid towards the loan, which usually requires for you to apply for yet another loan. This is one of those tricky loopholes that banks and credit unions can pull on new business owners. There are also very tight restrictions that the bank gives to you once accepted. If your debt level gets too high compared to your equity, then the bank may demand an immediate repayment of the loan.
What Does The Bank Do With My Loan?
The bank can sometimes even tie up your cash because they believe that it can be used in other parts of your business. Maybe you need a new piece of equipment for your business to run more smoothly, but unfortunately between your monthly balance and whatever may be typed up in the bank, you cannot obtain that money. The banks will typically suggest that you apply for another loan and you will be confused as to where your money went.
As a brief conclusion, if you can avoid getting a small business loan, try to do so. It is better to work towards getting a better credit score before you open your business so that you can work with the line of credit that you have built up.