by Gordon Hamilton

Created on: July 13, 2009

The disadvantages of small business loans are numerous and will apply often in the short, medium and longer terms. It is always wise for a small business to avoid taking a loan which it will have to service in addition to its existing outgoings but as there are occasions where it will be unavoidable, the only way the small business can minimise the risk is to be aware what to watch out for.

There are lean times for most small businesses when they will often find themselves short of necessary capital to service the running of the business. This is when the disadvantages of small business loans are most prominent. The small business owner may see the loan as a means of getting through the tough times and on to brighter pastures ahead but what they have to take in to account is the fact that they will have to make the loan repayments each month as well as their existing outlays. This could mean even bigger trouble ahead if the loan will run out prior to the business turning the corner and the small business owner should think very carefully in this respect before taking out a small business loan.

It may be the case that the small business is in need of new equipment to either continue to run or to expand the business. If the equipment is necessary, the small business owner may not have an option but if it is with a view to expansion, the small business owner should question whether the additional income will justify the cost of the loan in the short term. It may well be more cost effective in the long term to simply save the money towards the cost of the new equipment.

The disadvantages of small business loans also have to include quite specifically the sometimes prohibitive cost of them. The interest rates applied can be very high and in some instances, there will be an arrangement fee charged on the loan. Where this arrangement fee is added to the capital of the loan, it will also incur interest, increasing the cost even further.

It would be advisable therefore for any small business taking out a loan to shop around for same very carefully. They should investigate all their options before signing any agreement and ensure that they get the best deal possible, even where this perhaps involves taking their business away from their traditional bank.

The disadvantages of small business loans can in theory be so profound that they signal the end of the business altogether. They should therefore never be entered in to lightly and proper calculation as to their repayment and features should always be made in advance.

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