An often-encountered measure taken by governments around the world, during a financial crisis, is to offer state-guaranteed bank loans. This is usually meant to help business owners get the financing required to continue functioning even if their profit has been substantially reduced. However, the government also guarantees loans that are designed to help a start-up’s development.
Most individuals often consider these government-guaranteed business loans to be the best go-to tool during periods of financial instability. However, this is not always the case. As useful as they may seem – and be – these loans can sometimes be considerably more dangerous than regular ones because the government often requires more financial information and imposes stricter rules.
This having been said, government-guaranteed loans should not be avoided, especially in exceptional cases such as during the Covind-19 pandemic. The stricter measures imposed by the guarantor do not make the loan dangerous in itself. However, they do mean that the borrower must take extra precautions and make an informed decision.
What Is a Government-guaranteed Business Loan?
Government-guaranteed business loans are essentially secured loans that business owners can apply for and are guaranteed entirely by the government. While this does mean that all the collateral is offered by the government, to the lender, there are still requirements that borrowers must meet.
As with any other type of loan, lenders such as banks will still perform credit checks and calculate credit ratings to determine what terms and conditions they are willing to offer. Furthermore, the government, as a guarantor, may also perform financial checks to establish if a borrower is eligible or not.
Unlike most secured loans, the ones that have the state as guarantor tend to have very strict restrictions in terms of what can be done with the money. Depending on the type of the financing project, some loans may be designed to be used as running capital while others may only enable businesses to pay wages and taxes using them.
For many, state-guaranteed business loans are a godsend that helps them go through rough patches or times of considerable financial instability. However, many take them for granted and use the money inefficiently. Only to find out that these loans are sometimes more dangerous than regular secured loans.
What Are the Pros?
- No Collateral Needed – The main purpose of these loans is to help companies that would not be able to put up the collateral needed to secure them. As a result, business owners are not required to offer any type of collateral. This aspect is handled entirely by the government;
- Access to Large Amounts of Money – Secured loans are traditionally larger than unsecured ones, and those secured by the state can give businesses access to very large amounts of money. The size of the loans is usually either determined by the design of the program or potential and current financial situation of the company;
- Low or No Interest Rates – State-secured loans usually have very low-interest rates attached to them, if any. This is usually because the state is considered to have the best possible credit rating. In other words, lenders are sure that if the borrower is unable to repay the money, they will be able to recover it from the guarantor. However, most of these loans do not have any interest rate attached, as they are offered as a means to restart the economy;
What Are the Cons?
- Strict Restrictions – Most state-secured loans are designed for very specific purposes, depending on the overall needs of companies maybe during a financial crisis. Some can only be used to pay wages, taxes, and other vital expenses, while others can be used to run capital or expand a business. Restriction-free state-secured loans are rarely offered, and only in extreme situations;
- Strict Repayment Schedule – These loans must always be repaid on time and to the last penny. If a borrower skips a repayment term or ceases to make payments altogether, both the lender and the guarantor (the state, in this case) send liquidators are dispatched immediately to recover as much of the money as possible;