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Pros and Cons of Commercial Loans

Why a Commercial Loan Might or Might Not Be Your Best Option

While most business owners would prefer to be independently wealthy instead of having to deal with a commercial lending institution, the reality is that, eventually, all entrepreneurs end up interacting on some level with such agencies. No offense to banks, credit unions, and the like, but anytime that you have to rely on outside funding sources, obviously there are both positives and negatives associated with such transactions.

The advantages of pursuing and potentially obtaining a commercial loan include, but aren't limited to, the following:

• Multiple loan options exist - Along with a standard business loan, commercial lenders can potentially provide you with access to Small Business Administration (SBA) loans, or non-commercial loans that can be used for business purposes including personal and home-equity loans.
• Lower interest rates - While the repayment terms of the numerous commercial loans vary, a business loan usually has a low interest rate in comparison to many other funding options, including those associated with credit cards and finance companies.
• The lender has little, if any input, in how the money is spent - While a commercial lender will review your business plan detailing the potential use of the funds that you're seeking, they seldom have any direct control over how you actually spend the money that you receive.
• The lender isn't entitled to any of your profits - Other than repayment of the original loan and the associated interest fees, your financial output to the commercial lender is limited in comparison to the profits that you would need to share with various "equity investors."
• Commercial loan interest payments are often tax-deductible - The structure of most commercial loans allows you to claim a deduction on your taxes related to the interest payments that you're making on your business loan(s). Do your homework on this issue and realize that principle payment deductions are seldom, if ever, allowed.

The disadvantages of pursuing and potentially obtaining a commercial loan include, but aren't limited to, the following:

• The application process can be lengthy - While this could be said for many avenues that you pursue for business financing, commercial lenders are often more stringent in their guidelines and therefore require more information and a greater review process.
• A standard business loan is often limited to pre-existing businesses that have a financial history of success - While other loans (e.g., SBA loans) can be granted for new businesses, many of the "typical" commercial business loans are reserved for companies that can provide documentation of an already-existing healthy financial status. Lenders obviously do this in order to increase the likelihood that such a loan will be repaid.
• Qualifying for a business loan can be difficult - As mentioned before, strict guidelines to ensure a high probability of the loan being repaid make the commercial loan process more difficult to "conquer" successfully than other available options.
• A home-equity loan used for commercial purposes involves a substantial risk - Even though most home-equity loans allow for a long repayment period, there is a chance that you could actually lose your home if you become unable to repay the money that you've borrowed for business purposes.
• Collateral is generally required for commercial loans - While collateral might or might not be required of other lenders, a commercial institute usually insists on it.

Depending on your personal and business financial status, including the past as well as the present, and your own specific needs and desires, a commercial loan might or might not be the best choice for you. Regardless of what sources of funding you seek, there will be pros and cons associated with each option. Choose wisely and you will eventually be successful in acquiring the funds that you seek to make your home business dream a reality.

Good luck finding the perfect home business opportunity!

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