disadvantages of higher cost of borrowing
Answers
Answer:
High-Interest Rates
That could potentially make the loan very difficult to repay. There is also the possibility that the terms of the loan can change during the life of the loan, making it unfavorable for your business.
Explanation:
Disadvantage: You Risk Foreclosure if You Can’t Repay The Loan
A bank won’t take ownership of your business when you first take out a loan. However, depending on how the contract is drawn up, you risk the bank foreclosing on your business in the event that you are unable to repay the loan.
Most business loans are secured, which means something is backing the loan. It could be collateral or a guarantee. If the loan is secured by collateral, then the bank can claim some asset of yours or your business in the event that you cannot repay the loan. In the most extreme cases, the bank can take over your entire business.
Disadvantage: Guarantee Secured
If the loan is secured by guarantee, then it means that someone else has cosigned on the loan and it is their personal assets or the assets of their business that are on the line. If you don’t repay the loan, you will be putting someone else at risk.
If the bank takes over your business, it is up to them to figure out how to recover their money from your business, which might involve selling it as a whole or disbanding and liquidating it altogether. That can be devastating for many business owners.
Disadvantage: High-Interest Rates
When you take a loan from a bank, there is always the chance that interest rates could go up over time, especially if you’ve taken a loan with variable interest terms. That could potentially make the loan very difficult to repay. There is also the possibility that the terms of the loan can change during the life of the loan, making it unfavorable for your business. Many banks have been known to make stricter demands and harsher terms for loans given to businesses when those businesses undergo a period of failure.
Disadvantage: It Could Ruin Your Credit
Your credit history is an important factor that the bank will consider when deliberating on whether to give you a loan or not. You don’t have to worry about your credit rating when you’re exploring other sources of funding, such as equity financing, but it is one of the most important factors in debt financing.
If you have a good credit rating, then you can look forward to better chances of getting your loan application approved and getting favorable terms. On the other hand, bad credit will make you unattractive to most banks and make it very hard for you to get a loan.
Disadvantage: Risking Your Credit Score
Even if you do have good credit and manage to get a loan from the bank, you risk jeopardizing your credit score when you fail to make payments on time or fail to pay the loan back completely. Short term loans are the riskiest as they can bring your credit score down in a short amount of time. With a long term loan, one missed payment can be rectified by making future payments on time. With a short term loan, that one-time payment may be all you have to save your credit score and missing it might make all the difference at your next loan application when your credit score is less than perfect.
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