Sema Fongod of Invoicediscounting.uk.com highlights the potential benefits and pitfalls to consider before putting pen on paper for a bank credit facility.
Borrowing money from a bank is not a concept introduced today. 9 out of 10 entrepreneurs will borrow money from a bank at some point in their lives. The banks are not as user-friendly as they were prior to the 2008 credit crunch but they remain a useful resort when seeking finance.
Borrowing from a bank doesn’t always necessarily have to be about queuing up in the bank for a loan facility. Banks also extend credit via credit card and overdrafts.
Businesses borrow money from banks for a variety of reasons. Some need additional capital to finance a new business van. Others might just want to catch up on their monthly bills. Most importantly, businesses borrow money to make money i.e. invest in profitable ventures.
Imagine this scenario: “My business partners are going out on a surf trip costing £650. We really can’t afford it, but are willing to grab one of their main supplier contracts. Should I be firm (and potentially lose out on the contract) or should I just put it on the credit card?
All forms of bank finance require you to complete an application, providing financial paperwork and trading evidence and wait for a response. It’s not uncommon to be placed on hold whilst on the phone to a loan specialist. Is borrowing from banks really worth the hassle? Here are a few advantages and downfalls of bank borrowing:
Benefits of Bank Borrowing
Depending on your business circumstance, a bank loan or overdraft can be secured within say 24 hours. Highly solvent businesses with healthy balance sheets would easily qualify for all forms of bank credit and have a shorter turnaround time.
With accurate judgement and convenience, the credit released can provide working capital for a business. You can make large purchases that you might not be able to afford otherwise.
In this current economic climate characterised by loan sharks and other illegal money lenders, borrowing from a bank carries the advantage of offering a safer and more competitive interest rate.
Pitfalls of Bank Borrowing
There are a number of limitations to bank borrowing. Good credit is often required to borrow money, and there are stipulations on how the money can be used.
Like any other funding facility, when you borrow money from a bank, the bank charges you interest on the amount borrowed. This is supposed to be the cost of borrowing. However, there are some hidden fees that apply. Bank loans for example may require you to pay a non-refundable application fee. Some loans also carry a prepayment penalty, preventing you from paying the loan early.
Borrowing too much money can lead to decreased cashflow and payments can even overtake income in some cases; this is why many loan payments are limited to a certain percentage of a borrower's income.
Of course if you default on a credit loan, this impacts your credit score and can prevent you from taking out credit in the future. Remember that banks report their financial accounts to credit rating agencies and bureaus.
Making credit payments on time and having a fair credit history can boost your credit score. However, this is not always possible as many firms struggle to live within their means.