The Pros and Cons of Small Business Loans

Most growing businesses will need to borrow money at one point or another. Whilst taking on debt is inherently risky, it is often vital to power business success, fund a major marketing campaign or simply deal with an unexpected cash flow crisis. So what are the pros and cons of taking out business loans?

The pros of small business loans

You don’t have to dilute your equity

One way to avoid borrowing is to sell equity in the company. Many businesses choose this option as a way of raising cash without incurring interest or having to make repayments, but it will dilute your ownership of the company and hence the share of profits you enjoy. Do you really want to work round the clock to share the proceeds with an investor who hasn’t taken on the burden of running the business?

Related: Choose the Right Small Business Loan for Your Startup

You can accelerate your growth

That major marketing campaign you’ve always promised yourself could take your business to the next level, as could hiring world-class talent or taking your offering international. However, all these things cost money, and if it’s money you don’t have, you will need to consider taking out a loan.

You can overcome cash flow challenges

Even the best-run business can hit a sudden cash flow blip, and if you don’t have appropriate business finance options in place, then these crises can prove terminal. Ironically, these problems can be most serious when your company is enjoying significant growth, as taking on new customers means paying for people and raw materials in advance of getting paid.

The cons of small business loans

Repayments can damage your cash flow

Of course, debt repayments can themselves derail your cash flow if your business becomes too highly leveraged. It’s therefore important to borrow for the right reasons, at the right interest rate – and to make sure any repayments you take on are realistic and affordable.

Interest rates can be high if your credit score is low

Not all loans are equal when it comes to affordability – and your credit score will have a great deal to do with it. If your business appears a risky investment, you will find yourself paying a great deal more for the same finance, so you should concentrate on building your reputation and your credit score before seeking a loan.

Related: Sign up to receive the StartupNation newsletter!

Borrowing can reduce your options

Seizing an opportunity today can mean forgoing opportunities tomorrow. Repayments will reduce your spare cash for the term of the loan, meaning you will have less to spend on premises, plant and people. However, if you borrow for the right reasons and at the right rate, you should be able to give your business a boost that repays dividends in the future.

The decision is yours

As can be seen, there are both advantages and drawbacks to taking out a business loan, as with anything in life. However, if you’re prudent, the right loan can give your business the edge and open up opportunities that otherwise wouldn’t be available.

Leave a Reply
Related Posts
Read More

How to Start a Food Business from Home

So, you’re an aspiring home-based master chef, and you have a flair for herbs, spices, and all things nice. You have probably thought about turning your culinary skills into a successful home business. You can...