The Disadvantages of a Small Business Loan

In our economy, small business is often praised as the savior of a stagnant market; the result of hard-working, innovative, bold individuals seeking to share a good idea with the world and make some money in the process. The field of small business start-ups is a tricky one, fraught with risk and pitfalls, only adding to the esteem that is often given to those who pursue such endeavors.

One tool that many use to assist in getting their small-market idea off the ground is filing for a small business loan, whether at their trusted local bank or by petitioning federal entities dedicated to distributing such funds, such as the United States Small Business Administration, or simply SBA. While obtaining this sort of loan may make sense, to raise capital quickly in exchange for being able to pay back over time, it actually comes with a few drawbacks.

Learning Curve

Unless the applicant has taken a business course or done the proper research, applying for a business loan is no easy endeavor. Typically a founder must turn in a business plan to convince the loan officer that the idea is legitimate. The more data the better, but it can be difficult for a layman to conjure balance sheets, marketing mixes, exit strategies, or other factors of an exceptional documentation. Even with these elements involved, landing a loan is never a sure thing, and any business acumen is an asset, which most people lack. A wonderful idea does not necessarily translate into a wonderful organizational tactic.

Entrepreneurial Stigma

Depending on the field and target market, filing for a small business loan and bring on, perhaps unfairly, a stigma in the market. After all, with so much dialogue about wasted spending and people relying on handouts, a loan can be seen as a preemptive bailout. In addition, it can cause problems for local networking, which is usually essential: Imagine the disdain the family restaurant down the street feels when the new kid on the block shows up with an expensive new promotional sign he bought with loan money.

Fiscal Liability

Perhaps the most compelling disadvantage is simply that a loan is a liability! From the moment the funds are granted, there is now a debt on the business's books. It is also important to note that the loan, as with all loans, builds interest over time. This debt, and the interest, are two elements that may not have necessarily factored had the applicant instead vied for private means of raising capital.

Even with these reasons in mind, this does not mean that small business loans are terrible things. In fact, for many, they are exactly what their plan calls for. The important lesson is to remember to not simply assume that everyone needs a loan; often, a viable alternative is available to get a great idea out of development and into the profit zone.