Similar to a personal loan, a business loan is one specifically intended for business purposes. Like any other loan, it involves the creation of a debt to be repaid with interest. Depending on your business and your situation, you may be considering taking out a business loan.

Many companies require an adequate amount of capital, or funding, in order to fund their startup costs. Others may be looking to expand their business. Wherever you find yourself, know that there are pros and cons to taking out a loan.

Reasons to Take out a Business Loan:

1. You are ready to grow and expand. You’ve been successful at your business for a period of time and are ready to grow, physically that is. Perhaps you’ve outgrown your office space and need additional room to see additional clients or are looking to get out of your home office and into a more professional space. While the short-term costs and change in overhead may require financing, adding on with physical space allows the potential of additional revenue (i.e. more clients) in the future.
2. You are just starting out and need equipment for your business. Purchasing equipment and inventory needed to start a business is one of the largest start-up costs. You may need computers, furniture, or other items to be able to perform your service. An equipment loan is often easier to receive as the equipment is held as collateral for the loan and can be collected on for repayment if needed.
3. You need to hire (or outsource). Adding a fresh face (or two) to your team can help set your business up to grow and succeed well into the future. With tasks off your plate – think of the time you spend on bookkeeping, invoicing, marketing, and social media – you can focus instead on adding clients to your business. As long as there is a clear connection between hiring and an increase in revenue, it may be worth taking out a loan to cover securing top talent.

Reasons to Not Take on a Loan:

1. You lack confidence in your ability to pay it back. Before taking out a loan, consider both your business and personal finances. Are you in a place to be starting a business? Are your business finances solid enough to begin expansion? No matter the outcome of your business, the loan must be repaid, so the decision shouldn’t be taken lightly.
2. You have a business idea but haven’t researched it or created a business plan. This is the classic cart-before-the-horse scenario with start-ups. Make sure to spend your time researching a business idea, viewing competitors, creating a business plan, and even talking it through with a business coach. Putting together revenue (sales) projections and a full balance sheet will help you determine if your idea may be profitable enough to justify taking out the loan.
3. You’ve maxed out your other available credit. If you already have a business loan or credit card debt, taking on more debt (or trying to pay off debt with debt) may not be the best idea. Make sure you have a budget in place with estimated debt payback projections. Talking through options with a business debt counselor may help set you on a path to paying off debt without becoming overextended.

Taking out a business loan is a personal decision as well as a business one. Just like starting your business, taking on debt requires a risk. If your business is successful and you have confidence in your ability to pay back the loan in installments and on time, it’s a worthwhile decision for the growth and stability of your business.

Considering outsourcing your bookkeeping to spend more time on your business needs? Please reach out to us for a free bookkeeping consultation! We’d love to help with your monthly bookkeeping needs!