Should a Business Get a Start-up Loan?

If you are thinking of starting up a business, then you will need to consider the financing. There are different ways to finance a start-up and these will partly be determined by how much the business costs to start. Some businesses have a lot of costs and others will have very little, it all very much depends on what you are going to do. If you need premises, equipment and staff, then your costs will be relatively high as you will have to also pay insurance, utilities and things like this. If you are a sole trader working from home providing a service, you may not need to buy anything at all to start your business or just a domain name and business email. Therefore your first decision as to whether to get a loan is very easy as it will be determined by how much money you need to start. You may need nothing or very little, which you can afford or you may need more.

It is always wise to put together a business plan. If you do ask for a loan, then your lender will want to find out that you have a good business plan and therefore can show that you will make enough income to be able to afford the loan repayments. You will also need to look at this for yourself too. Although it is great to be positive and imagine the best, it is also wise to think about what may happen if things do not go so well. How will you afford the loan repayments if the business is not making enough money. You may have some savings you can fall back on, there may be other people in the household who may be able to help you out and you may be able to earn money elsewhere or maybe already have income coming from other sources which will help.

If you do have savings, then you will need to decide whether it is better to use these than to borrow money elsewhere. You can use it as a loan to the business and pay yourself back as you start to make a profit. This is good because you can lend to the business at a low or free rate which will be less costly to the business. However, it will mean that you will not have any money to fall back on if things do go wrong and you cannot pay yourself a salary from the business. It can even be a way that you can personally make more money form the business, if you lend it, then charge interest. Those interest payments will come out of the business costs and therefore reduce the tax the business will have to pay, but they will make up part of your personal income so you may have to pay tax on it that way, if you earn enough to pay tax. It can be worth discussing it with an accountant as they will know the legalities and tax benefits of doing this.

There are alternative ways to fund a business rather than a loan. It could be worth taking a look at these so that you are aware of all of the options. These could be cheaper than a loan, which could help you as a loan is a big commitment.

It can be worth thinking hard about whether to borrow and how much as well. Taking on a new business is a big responsibility and will take up a lot of time and effort. This will be stressful and you will not want any money stresses creating even more stress for you. If you need to be finding loan repayments every month as well as working hard to make a profit and get a business building up, it can be just too much. It can be tempting to borrow a nice large sum of money so that you have lots to buy things with when you are starting out. It can be fun buying new things and setting up and feel like you are really building the business resources quickly.
However, it will take time to start making money back form the business and you will need to make those loan repayments. If you overspend, you may find that you are not able to make the repayments and that you really start to struggle. This can happen quite quickly as it takes time to find customers and get money coming back in. There are also often lots of things to pay for in the beginning so money coming in can be easily spent.

So a business loan can be an even bigger commitment than a personal loan as you will be taking on so much at the same time as the loan. It is worth calculating how you will make the repayments, should the business not make enough to cover this cost. It is also worth working out exactly how much you need to borrow and borrowing the minimum amount that you can. Also think whether you have the money to lend the business and if this is something that you want to do.

Leave a Reply