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Advantages and Disadvantages of Bank Loans

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Borrowing and lending have become common in recent years, and bank loans are an essential part of this system. Various types of bank loans are available to meet individual and business financial needs. As with any other product, there are advantages and disadvantages to bank loans. Let’s have a closer look:

ADVANTAGES OF BANK LOANS

The following are some advantages of bank loans.

PURCHASE WITHOUT LIQUIDITY

A primary goal of a bank loan is to lend to people who do not have ready cash. A bank loan can help an individual or a business buy something as simple as a car or a home for which he doesn’t have a corpus, or it can help businesses to buy machinery or set up big units for which it doesn’t have money. The scope of a bank loan is vast, and the borrower can borrow as per their capacity, depending on their creditworthiness.

DRIVER OF GROWTH

Bank loans are significant growth drivers, especially for public and private sector companies. Very few companies may have enough cash flow for financing colossal expansion. However, in today’s fast-track economy, development is the only way to have sustainable profitability. This is where bank loans come into the picture. Suppose Company A wants to expand its production for which it needs to invest in machinery. If the cost of machinery is five times the company’s yearly net income, Company A does not have to wait for five years to expand. It can borrow a term loan from the bank to fund its expansion plans and repay it over the next five years, thereby accelerating growth.

PROVIDES CAPITAL FOR DAILY OPERATIONS

The banks have outstanding loans that can help a company fund its day to day operational capital and cash cycle. The working capital bank loans and cash credit loans are significant bank loans used for the purpose. This allows companies to be flexible about their debtor and creditor agreement. Suppose Company X has purchased goods worth USD 1000.00, the payment of which has to be made in 10 days, whereas it sells these goods in USD 1200.00, which it will receive in 30 days. In such a situation, Company X can borrow USD 1000.00 from the bank for 20 days and repay the USD 1000.00 to the bank after it receives payment of USD 1200.00 from the debtor. A significant advantage of such a loan is that the company has to pay interest only for the amount and the number of days for which it has borrowed.

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