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?
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.
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.