A business loan is an excellent way to access new financial resources and secure favorable repayment terms. It has many advantages, including flexible repayment terms, no collateral requirements, and no lengthy application process. But these advantages are offset by a few drawbacks. These disadvantages are often more difficult to deal with than the benefits of a business loan. Here are 5 common pitfalls to avoid when applying for a business loan. These are: High interest rates, Requires collateral, Is not flexible, and Is Not Tax Deductible.
High interest rates
When looking for a business loan, it is important to understand how the lender measures your creditworthiness. Most lenders look at your personal and business credit scores when deciding whether or not to lend money. While your financial habits and credit score may be indicative of your business management style, lenders also look at how much money you have to borrow. New businesses are usually riskier to loan to than those that have been in business for some time. As a result, most lenders require a history of your business before approving you for a loan.
Different types of business loans come with different interest rates. While the Small Business Administration (SBA) offers loans with relatively low costs, alternative small business lenders charge higher interest rates. While you can’t control all of these factors, you can wait for favorable interest rates to apply. There are some tips to help you avoid paying too much for a business loan. A good rule of thumb is to keep the loan repayment schedule as flexible as possible.
Requires collateral
Whether you’re seeking a small business loan or a larger loan for your existing business, one of the first questions you’ll need to answer is whether you’re required to put up collateral for your business loans. While your strong personal character and business experience are valuable to lenders, they may not be enough to get you approved for a loan. While the SBA will not reject your application for lack of collateral, you should be sure to have tangible assets that are worth the loan.
The value of your collateral is the main factor in the loan amount you’ll need to borrow. Typically, lenders only lend up to 80% of the value of your collateral. This means that if you’re looking for a $100 loan, you’ll need collateral worth at least $125. While most lenders require some form of collateral, high risk businesses and those with poor credit will need more. In any case, it’s worth contacting lenders to see what their specific requirements are.
Isn’t tax deductible
Are you wondering if you can deduct the interest from your business loan? If you use the money for your business, it may be. However, it is important to note that you cannot deduct the loan principal because you’re simply paying back borrowed money. To qualify for a tax deduction, you must spend the money on your business. In addition, you can’t deduct the interest if it sits in your bank account.
The interest you pay on a business loan is tax-deductible as long as it’s in your name. Moreover, it should be in the form of a UCC-1 statement that you submit with your tax return. Besides, you should be legally liable for the debt. This means that the lender must expect repayment from you, and you must be making regular payments on the loan. You’ll save money in the long run by paying a lower interest rate.
Retains full control over your business
Retaining full control over your business is vital if you want to protect your intellectual property. Intellectual property is the core of your business. Protecting it is essential to ensure its continued success. It is also an important asset for succession planning. Here are some ways to retain full control of your business. Listed below are a few of them. Let’s explore each of them in detail. These strategies are beneficial to both you and your successors.