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Disadvantages of Debt or Loan Funding for an Indian SME Business

Apohan Corporate Consultants Pvt. Ltd. > Financial Strategy > Disadvantages of Debt or Loan Funding for an Indian SME Business

Disadvantages of Loans

The biggest disadvantage of a bank loan is the fixed guaranteed periodic interest payment and repayment of the principal amount. Don’t understand circumstances of the business and any non payment is considered as default.

Don’t look at the merit of the business, quality of the management or potential of the business sufficient criteria to lend. They must be provided some or other type of security on margin money which becomes a serious limitation on the amount of fund that can be raised. As an institutional lender, bank officers have very less flexibility in processing the loan applications and they made turn down and application even for frivolous reasons. They will not provide loans to new businesses for businesses with poor credit history. Technically, a business is a client of the bank but there is hardly any tendency to sell more. In India, there is good degree of corruption in the sanction process. The corporate form of business is to basically segregate the the owners from the management of a company in terms of any rights and liabilities. But the bank requires the promoters and the directors are the shareholders to provide personal guarantees putting their personal properties at risk. We can see a number of cases in the market, where the banks are auctioning the personal assets of many businessmen. The plight of such honest businessmen is the last thing one would like to see. The phenomenon of these options discourages a layman from undertaking any business venture. Another aspect of bank loan is that it becomes more difficult to avail any money in difficult times. So banks are only good weather friends. In the history of long existence of a business, they do suffer a once in a lifetime misfortune due to circumstances beyond control of management. The business is still very much viable if certain relaxations or or additional credit is provided. The worse the situation of a business, the worse the behaviour of a bank! Payment to bank takes the first priority, and if a good opportunity is is passing by, the business cannot use its money to pursue that opportunity. Occasionally, this does cause a very serious opportunity loss to a business. Bank loan repayment in most of the cases must start almost immediately. For businesses with a long gestation period, this becomes as good as borrowing from the bank to pay the bank. Banks are very rigid when it comes to provision of enhanced credit or credit with second charge even if the value of the security has increased. The financial expertise is of the banks is of absolutely no use to a business. The rules of the banks are very stringent when it comes to to providing better terms on request of a borrower. It is most likely that most of such requests are rejected by the bank. Bank is simply not bothered with the cash flow situation of the seasonality of a business. They are very particular about the date of payment of the installment amount. One may lead to think that bang doesn’t interfere in the day-to-day operations, but when a business defaults the bank takes complete control of the business intends to be driven by the sole objective of realising its own dues without any regard to future of all other stakeholders of the business. A bank does not have business competence, and hence mostly fails to to sale the business as a going entity. This results in liquidation of a business resulting in huge economic value loss. Banks are protected by a very solid legal framework and the entire machinery of the state for law and order is there hands to recover the dues. One more disadvantage of bank lending is that the banks cannot distinguish between wilful default and a circumstantial default. Their treatment of the good, bad and the ugly is the same. This leads to emotional and psychological distress of a genuine businessman. The banks have their own rules of sector exposure, single account exposure, etc. With the increase in Corpus of the loan amount, the process of bank loan becomes equally tedious as equity funding. The small local, rural, cooperative, district, urban, etc banks have relaxed credit norms but their interest rates are very high. This kind of disadvantages more or less apply to all other types of institutional lenders. Apohan helps a business in negotiating the bank loan contract and having a successful borrowing strategy. However, unlike we provide end to end services in equity funding, we don’t provide end-to-end services for business loans from banks and other institutions. Apohan’s unique selling point is its ability to successfully generate equity funding.