Should You Get a Loan to Start a Business?

FVP, SBA Deputy Lending Manager

A business loan is a powerful tool. It can take your company from a hypothetical to a reality or serve as rocket fuel for your start-up to help it reach new goals. The extra capital can be used towards an emergency fund or ensuring liquidity, as well as investing in new property or marketing to broaden your reach and capabilities.

However, a business loan is neither free money nor without its risks. Sign-on without doing due diligence can lock your company into unnecessarily high interest rates. Plus, failure to meet the agreed-upon terms can damage your credit score.

This article will explore the pros and cons of business loans to help you determine whether it’s a good idea for your company, as well as how to borrow responsibly.

What Makes Business Loans Different From Personal Loans

The primary distinction between a business and a personal loan should be obvious from their names, alone (one is for an organization while the other serves an individual). However, there are other noteworthy differences, such as:

• Business loans are tax-deductible, unlike many personal loans
• Business loans are more likely to require collateral
• Business loans are based on the credit score of the company rather than the individual
• Business loans tend to have a longer repayment timeframe than personal loans

Should You Get a Business Loan - The Pros

The largest benefit of getting a business loan is quite clear—fast access to cash when you need it most. However, this isn’t the only advantage of getting a business loan. Below are additional upsides of which you may not be aware:

• Business loans are tax deductible - We touched upon this briefly in the above section, but this benefit is too good not to mention twice. The interest payments you make towards the business loan are all deductible from your reported income.
• You can establish a credit history - As is true for individuals, business debt can be a good thing. The more you prove your company to be responsible by adhering to a payment plan, the more lenders will want to work with you in the future. In turn, you may be offered lower interest rates at later dates.
• You can buy supplies in bulk for discounted rates - Many times, the more you buy of an item, the less it costs per unit. If you need parts, ingredients, or inventory that has a long shelf-life, a loan can let you buy them in bulk to potentially help you save money in the long-run.
• Business loans grant the freedom to run your company with no outsider oversight It’s worth acknowledging that a business loan is not the only way for an entrepreneur to get financing. Another common route, obtaining investment money to run your company, means that you are now beholden to others. Depending on the details of the arrangement, the investor may want some say on business strategies. Contrastingly, a bank that grants you a business loan won’t insist on overseeing decisions or operations.
• Business loans come in different types - While some business loans are fairly general in their intended use, others exist to help recipients cover specific needs. For example, equipment loans are essentially lease-to-own plans which last the expected lifespan of the purchase. An experienced lender can work with you to determine the best business loan type to fit your unique circumstances.

Should You Get a Business Loan - The Cons

It’s natural that the above-mentioned benefits would have any entrepreneur salivating. However, it’s not always a good idea to get a business loan, especially if you’re not prepared to meet the terms or fulfill future financial requirements. Potential downsides of a business loan for a start-up include:

• You must pay back the business loan with interest - No loan, commercial or otherwise, is without interest. Make sure you know the precise details of the repayment requirements, including the duration, the interest rates, and whether it’s a fixed or variable loan.
• Failure to keep up with the terms of your loan will hurt your company’s credit rating - A business’s credit rating operates similarly to an individual’s; a low score will make it difficult to pursue a future line of credit with fair rates, as well as to lease equipment or property. Depending on the nature of your business, fellow vendors or customers may hesitate to engage with a company with a subpar credit score.
• Failure to pay your loan may result in loss of collateral - As previously stated, it’s not unheard of for business loans to require collateral, such as expensive equipment and real estate.
• Business loans can come with additional upfront costs - These include origination and closing fees, prepayment penalties, mandatory insurance, and maintenance fees. These are not required by every lender, so make sure to inquire when comparing your options.
• It may be more challenging to get a business loan from a bank if you’re first starting off - Naturally, lenders will want to partner with companies they’re confident with repayment ability. Therefore, they tend to prefer businesses with an established history rather than one that has yet to launch. However, don’t fret; getting a business loan as a start-up isn’t impossible. Simply expect greater examination of your personal finances, heavy scrutiny of your business plan, and potentially above-average loan rates.

Tips for Responsibly Paying Back Business Loans & Minimizing Risk

• Only borrow from reputable lenders - Not all business lenders are created equal. You’ll no doubt want to browse around for the best terms and interest rates, but also verify the validity and experience of the bank or loan company. Ask plenty of questions and pay close attention to the lender’s level of transparency. Plus, the application process should be swift and smooth, indicating a higher level of professionalism.
• Start small when pursuing a business loan - If you’re a start-up, you’re still getting to know your business, your customer base, etc. You have limited financial cushioning or historic data which can clue you into buying and supply chain trends. Therefore, it’s a good idea to get a smaller business loan you can be confident about paying off. As your company and experience grow (as does credit score), there will be future opportunities for additional lines of credit.
• Have a detailed business plan - A business plan is a prerequisite for getting a loan. However, don’t treat it as merely a box to check off. The more thoughts and details you put into your business plan, the more likely you are to borrow only the amount needed and not place your business into unnecessary
• Factor your loan repayments into every financial decision - Ideally, your business should have a generous financial cushion in anticipation of slow sales or unexpected costs. Make sure to account for your repayment obligations when making other budgeting decisions so you never find yourself slipping further into debt.

Business Loans vs. Business Credit Cards

We’d be remiss not to talk about another type of debt available to companies, business credit cards. It has the advantage of requiring less paperwork and faster approvals than formal loans and is a lower-risk way to build your business’s credit history. What’s more, interest rates only apply if you pay off your debt later than the due date.

Nonetheless, the largest downside of a business credit card is that the provided line of credit will be substantially lower than what’s offered by a loan. Plus, there is often a minimum-spend required for the first few months. Lastly, certain expenses may be more difficult (but not impossible) to cover with a credit card, such as employee salaries or rent.

Our take? Most companies would benefit from having key staff members access business credit cards to cover smaller, day-to-day expenses. However, the limitation of this strategy means that a credit card may not be enough to achieve your business’s lofty goals.

Next Steps for Getting a Business Loan

With the right planning, the pros of getting a business loan outweigh the cons. If you decide that your company is prepped to make the most of additional financing, here’s the expected steps for when you apply for a business loan:

• Research multiple business lenders - We know Bank of Hope offers competitive rates and accommodating terms, but we encourage you to do your research into what else is available. This way, you can be confident in whomever you choose to use for your business loan.
• Organize the necessary paperwork - The lender will want to ensure that you’re ready to get a loan by evaluating your business plan and financial records. They’ll commonly ask for tax returns, income statements, balance sheets, a list of worthwhile collateral, and any relevant licenses. If your business is just getting off the ground, a lender may scrutinize your personal fiscal health and history as an indicator of how well you’re likely to manage your company’s finances.
• Complete the application - Next comes the actual application, either completed online or in-person. We suggest arranging an in-person appointment so you can use this time to ask questions and vet the professionalism of the lender.
• Wait for underwriting - Assuming that your business loan is approved, the lender will begin the underwriting process which involves in-depth probing of your business to verify that you’re a reputable candidate for a loan.
• Finalize the loan - In this final stage, the lender agrees to grant you the business loan. You are given one last chance to back out before agreeing to the specific conditions.

Why Consider Bank of Hope When Getting a Business Loan

Established in 1986, Bank of Hope provides personalized banking and lending services to both individuals and small businesses. We pride ourselves on our competitive business loan interest rates and flexible terms. Additionally, we work diligently to make the application process quick and easy, as well as to provide guidance tailored to your individual needs.

We offer a generous range of different loans—including but not limited to SBA lending, SBA express loans, commercial equipment leasing, and mortgage warehouse lending—ensuring we can offer a plan that fits your specific business and financial situation. Better yet, we offer other business-specific banking services, such as checking accounts and treasury management services, all accessible using our app. This enables you to centralize all of your business’s financial operations and to build a relationship with an expert that knows you well.

Schedule an appointment with Bank of Hope to discuss getting a business loan.