Should you consider taking a loan to start or develop your business?
In this article, with the support of the site https://myfin.us/, we will discuss whether small and medium-sized businesses should consider taking a loan at the stage of opening or development. What are the risks of lending to entrepreneurs, pluses, and minuses?
Risks for the borrower: How to minimize them
Many potential entrepreneurs believe that opening a business on credit is the solution to their problem. First of all, this is due to the lack of experience in doing business. It seems to them that the main nuance lies only in the lack of cash.
Yes, on the one hand, your business will develop at an accelerated pace, but the money received will have to pay back, and even more than one year. Of course, the risks can be reduced to the maximum. How to do this, we will consider below.
Reducing the risks of the borrower
First of all, do not take out a large sum of money at once. If your business will not develop according to the most ideal scenario, you will avoid problems with debt obligations.
The next important point. Do not forget that there are peculiarities of the market which do not depend on you, and you will not be able to influence them. For example, you have opened a store, it brings a steady profit. But at some point, a large shopping centre opens, the rental of retail space in which costs a lot of money. The situation turns out to be difficult: either you rent space in it for the store, or the competition simply cannot stand.
And in order to open a store in the mall, you need to get a loan again. It turns out that getting out of debt is extremely difficult. Take into account that the situation could develop in this way, and do not put yourself in a debt hole.
What else do you need to be prepared for:
- Irregular working hours;
- High-stress situations;
- The fact that you can’t get out of the business until you close the loan, and so on.
Pros and cons of taking credit
Let’s first analyze the pros of taking out a loan.
1. Easy to arrange
The big banking organizations have long-established a procedure for processing a business loan. The bank can help you obtain the funds, you will need only to collect the necessary documentation and wait until the bank makes a decision. This usually takes up to three days.
More in-depth inspections of entrepreneurs are not always carried out.
2. It is convenient to apply for a loan
Visit the bank office in person nowadays is no longer necessary, it is enough to fill out an application on the official website of the credit organization and wait for pre-approval.
3. Long-term credit
Depends on the purpose for which you draw up a loan. The term can be increased by a decision made by the banking organization.
4. Reduced interest rate
If you have a property that can act as collateral, your interest rate on the loan will be reduced to 12-15%. This is significantly lower than on conventional consumer loans.
So do I take out a business loan? Let’s find out all the pitfalls.
1. Property for collateral
If you simply do not have it, or the value of the property does not reach the amount of the loan, it is problematic to use credit. Especially if you are just starting your business. Suitable collateral is a car, real estate, or equipment.
2. The interest rate of a loan
If your business is growing rapidly, overpaying for a loan is not a tragedy. But when your business is virtually loss-making or requires serious investment, repayment of the loan can be a very heavy burden and can lead to bankruptcy.
3. Serious requirements for the borrower
Having an excellent credit history, high income – these are the requirements that are standard. Therefore, if you have outstanding loans or overdue debts, you should not count on the approval of the loan application.
4. A business that has recently started operating
A large number of banks offer loans to aspiring entrepreneurs. In fact, this is often just an advertising ploy. If you started a business less than six months ago, you won’t get a loan. Most likely they will offer you a normal consumer credit.
5. Problematic payment schedule
The problem is that the date you make a profit is hard to match up with the date of your next loan payment. If you have another source of income, you won’t have a problem, but if you don’t, paying your mortgage won’t be easy.
After reviewing the pros and cons of borrowing, it’s important to note that if you are not confident that you will make a profit from your business, it’s not a good idea to go into debt to the bank. Is it worth the risk if you can look for alternative ways out? If there are no problems with the business, taking out a loan will only help expand it.
How to do without credit
Without borrowed money is not only possible but necessary. There are different options: to use your assets, for example, to sell real estate or a car, to borrow money from friends or relatives.
For example, you have a car, which may well be sold, and invest the money in the development of their business. Yes, a car is not such a necessity, for some time is quite able to ride on public transport.
As for real estate, perhaps you have a summer cottage, where you were last time a few years ago? That’s a great way to sell it and put it back into your own business.
That way, you’ll have cash for the business, and you’ll avoid potential credit problems. Other than that, a short-term loan is also an alternative option. But keep in mind that the interest on it is much higher than on a business loan. Do not make large investments right away. Yes, in this case, the business will develop slowly, but it is not always a bad thing.
Many businessmen note that at some time it was the loan that literally saved their business and allowed them to take it to the next level. Business is a huge responsibility. If you are just starting it, think a hundred times whether you need it, and then make a competent and informed decision.