When starting a business, an entrepreneur is often faced with so many questions that demand answers. One of those questions centres on how the business should be financed. Should you borrow money to start a business?
This question may seem simple at first but to be able to give the best answer for your business, you have to consider the advantages and disadvantages first. So to help guide you to the best answer to this question for your business, we have highlighted some of the pros and cons of starting a small business with a loan.
Advantages of starting a business with a loan
- Covers Startup Costs – One of the biggest reasons for getting a business loan when starting a business is to be able to cover the huge costs associated with it. Personal funds are rarely enough, especially as unbudgeted expenses may arise hence starting a business loan can be instrumental in covering these expenses that the business incurs at startup.
- Readily Available Capital – Beyond the initial expenses, as a new business, it takes time to turn a profit but all the while your expenses don’t disappear till you can pay for them, they keep increasing regardless. Statistics show that it is at this critical stage that many businesses die due to under-capitalization. Having a business loan to work with at this critical stage of your business is essential to your survival. It provides your business with readily available capital to make a pivot, and cover your operating costs when you don’t have sufficient cash flow to keep your business afloat.
Disadvantages of starting a business with a loan
- Personal Liability – Most businesses that start with a loan are often required to provide personal guarantees before they can access the loan. While this is important to de-risk the bank’s investment it implies that once your business defaults, you as a business owner would bear personal liability for the loan and your personal assets may be taken to pay off the loan.
- Debt Pressure – Loans you have taken at the start of a new business have a tendency to put untold pressure on you as the decision-maker for the business. Banks and other lending institutions usually don’t care if your business has turned a profit before you’re required to start your loan repayment. This can be terrible for your business because your loan investment didn’t have enough time to grow your business as intended before you have to pull them out to repay your loan. This can have fatal effects on your business.
- Additional Costs – loans are not given for free, if you decide to take up a loan to start your business you would have incurred additional business costs in interest rates, loan processing fees etc. While this may not be deadly, additional costs like these would lower your profitability and increase the expensive costs of running
Now that you have the top pros and cons for starting a business with a loan what do you think? Is it a good idea to start your business with a loan?
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