A business loan can help you grow your business, or at least that’s what the banks say. Is it right for your business? Let’s break it down.
Last time I talked about how I’ve been getting ads inviting me to take out personal loans. This, however, overlooks the fact that I’ve been getting entreaties for literally years, all but begging me (or rather, Empathic Finance LLC) to take out a business loan.
“Grow your business with a business loan!” is the usual pledge. But does it work like that? And why haven’t I taken one out?
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What is a business loan?
A business loan is, put simply, a loan that you take out to be used for business expenses.
Unlike personal loans, some business loans can be “secured” (meaning that there is collateral that the bank can repossess for non-payment) or “unsecured”. As always, “secured” loans tend to have lower rates.
Here are some uses for a business loan, according to Investopedia:
- Startup costs
- Cash flow for everyday expenses
- Debt consolidation or refinancing
- Equipment purchases
- Business expansion
- Marketing and advertising
Plus, business loans can be rather large. My own credit union offers business loans starting at $250,000, which is quite a chunk of change.
So lots of options here. But if you are a business owner (and as many of you are therapists, you probably are), here are five things you should know before taking out a business loan:
1. What will the money be used for?
This may seem like a self-evident need, but it’s certainly possible to want to get a loan to ease cashflow needs and just decide the specifics later.
But you should only take out as much money as would benefit you, and no more, and to know what that is requires a detailed picture of what the money will be used for.
Are you expanding? Are you hiring other workers? Do you need to invest in new equipment or technology? And if so, how much is all of this going to cost?
The bank may ask for this information, but even if they don’t, you’ll want to have it. Otherwise, you’ll have more money on hand, but will have to pay it back with interest, costing you more.
2. What is your timeline for paying the loan back?
Similarly to knowing how much money you’re going to need, you should also have a timeline for when you’re going to pay the loan back.
The main reason why you need to know this is because you need to make sure that you have a plan of some sort. The worst kind of business loan you can get is when you just think “I know, I’ll get some extra money,” and then that’s where the thought ends. You will need to pay this back, and with interest! When you have a timeline, you can know, more or less, exactly how much this loan is going to cost you.
3. What will need to happen before you can pay the loan back in full?
You’re getting the loan for a reason. What will be the outcome because of that reason?
If you believe that you need to spend money up front in your business to make more money on the other side, you want to think about what will need to happen before that new income starts to arrive. Will it be increased sales/revenue? Will it end up being a lump sum in return?
The slower you pay back a loan, the more expensive it is, and so the more it will eat into your profits. While nothing is certain in business, if you have a sense of when you’ll be able to pay back the loan, you will be better able to predict what it’s going to cost you.
4. Do you have the money to make the payments now?
In most cases, you will probably have to start paying the loan back more or less right away. Do you have the cash on hand to make those payments?
Depending on the amount of money you take out in a loan, and how much cash on hand you have, this could be a big deal. A $500,000 business loan can be thought of in the same way as a mortgage, with mortgage payments to match.
If your business can’t afford to make those payments now, you may be personally responsible for making those payments. Make sure you’re being realistic about what you can afford.
5. Is there no viable alternative to a business loan?
Finally, it’s worth noting that a business loan isn’t always necessary. Sure, you get an immediate infusion of cash to your business, which is great, but it’s not free money; you have to pay it back.
In some cases, it may be better to just save up the money you need and forego the loan process entirely. It might be a little slower in ramping up, but it won’t saddle you with interest rates.
But, keeping the mortgage analogy going, it’s possible for you to save up enough money to buy a home in full without dealing with a mortgage, but it may take a prohibitively long time. So too with growing your business. If your needs are on the “mortgage” scale, and your revenue isn’t on the same scale, you may just want to think of this as a mortgage for your business.
Are you prepared for your business to take on a “mortgage”? Don’t proceed unless you’re sure.
Why haven’t I gotten a business loan?
The reason why I’ve never gotten a business loan is because I’ve never been convinced that the extra money I’d have coming in would be justified.
Since I’m a solopreneur, my costs are very low, and about the only reason I’d need lots of capital is for marketing/advertising expenses. But you know the famous phrase about advertising:
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
I’m just not convinced that I’d get a proper return on my investment.
Finally, I can save up money as my coaching income comes in, and use that to grow my business over time. It may not work for everyone, but it works for me.
Your business loan recap
To recap, here are the five things you should ask yourself before taking out a business loan:
- What will the money be used for?
- What is your timeline for paying the loan back?
- What will need to happen before you can pay the loan back in full?
- Do you have the money to make the payments now?
- Is there no viable alternative to a business loan?
If you can answer all of these questions to your satisfaction and in the affirmative, then you might want to think about a business loan. Otherwise, I’d focus more directly on growing your business.
You don’t need debt to grow your business, in the same way that you don’t don’t need debt to build wealth. Anyone who says otherwise is trying to sell you something.
