There are a few different ways to fund a new business. One popular option is to take out a loan. This post explores some of the pros and cons of using a loan to start a business.
The pros:
It’s faster than saving up money
Starting a business with savings is the best option if you already have a lot of money in a savings account. However, most people don’t have a lot of cash in savings. It could take years to build the savings you need to start a business.
Not everyone wants to wait years to turn their business idea into a reality, which is where a loan can come in use. Loans can allow you to access the funding you need fast so that you can launch your business immediately. This could be vital for entering the market at the right time.
You don’t have to give away equity
Another way to fund a business is to seek funding from investors. Money raised through investors does not have to be paid back. However, you do need to be prepared to give up shares in your future returns – usually at least 10 to 20%. When taking out a loan, you are not contractually obliged to give anyone else money forever. Once the loan is paid back, you no longer owe anyone anything and have total control over your profits.
There are many loan options
Loans are also a good option because there is so much choice of lenders (certainly more so than investors). You can use a bank loan, a credit card, a private lender loan, a credit union or a peer-to-peer loan. By taking the time to shop around for loan options, you can find a solution with low interest rates and affordable instalments.
The cons:
If your business fails, you still have to pay it back
Loans still need to be paid back, even if your business fails. Quite often the only escape is to declare yourself bankrupt. When using money raised through investors, you stop owing anything to anyone once your business stops making a return. Similarly, if you start a business with savings, you don’t owe anyone anything if your business fails.
You’ll pay extra in interest fees
On top of paying back the money you’ve borrowed, you’ll have to pay interest fees. This can make a loan more expensive overall than saving up money. Interest rates can vary on loans, but in most cases you can expect to pay 5% or more.
You need a good credit score
To be approved for a business loan, you often need a good credit score. There are few lenders that will give you a loan if you have a poor credit score – and any loan you are eligible for will likely have high interest rates. Other methods of funding a business such as saving up money or seeking help from investors do not require a credit check, making them better options if you have a poor credit score.