If you’re looking to start a small business that has a physical presence, the startup costs can be quite large and unless you already have access to funding from family, a trust fund, or you’ve done well for yourself, you will have to find a source of funding for everything you need. Is a bank loan a good idea?
Remodeling your brick and mortar store, purchasing equipment, vehicles, advertising space, employees and the many other expenses can take a considerable amount of funding and most small business owners don’t have access to all of the money they need to get the doors open in their new business.
For some businesses, there are government and private grants but for most, bank loans are the only option other than saving money over time but what are the pros and cons?
First, you can run your business any way you wish. Grants and other free funding often come with strict stipulations making you a slave to the funding organization. Venture capitalists will want a large stake in your company and personal loans from family and friends come with unwritten strings attached. Bank loans are completely hands-off.
Next, you can write off any interest paid on these loans on your income taxes. This can be a sizable write off so take this in to account. Not all businesses have this option, though, so ask a tax professional if you are unsure.
Last, bank loans give you access to large amounts of money, sometimes 20 times that of a personal loan. These loans also build your business’s credit rating as you successfully repay the debt.
The first drawback to bank loans is the application process. Before a bank gives you any money, they will want to know some very detailed information including projected income, other investors, operating documents, and cost projections. You will also be put in the hot seat and grilled over the information you provide.
The interest rates on commercial loans are often higher than those of personal loans and they fluctuate. There’s a chance that as interest rates rise, your loan payment could outpace your revenue stream making your business insolvent. Make sure to plan for the worst case scenario in these payments and completely understand the terms of the loan.
Finally, you will most likely have to put up some personal collateral before the bank offers you any money. Your home, your stock portfolio, your retirement, or something else. Be prepared to have a personal stake in the outcome of your business and make sure your spouse understands that as well. If you want to avoid using your personal credit to back up a business loan, you can engage in a fast credit building program. There are many companies offering serious programs over there. Do your research.
After weighing the pros and cons of a bank loan, make sure to shop around and consider using a Small Business Administration approved bank that has their loans backstopped by this government agency making loans easier to get.