Startup businesses often need financial assistance in the form of loans. Other small companies need to borrow as the business grows or for new company initiatives. Whether at the beginning of your business’ tenure or somewhere in the middle, you may need to borrow for your small business. If you do, there are specific considerations you should think about in terms of borrowing—from a commercial lender or even a bank—because of the impact they will have. 

Borrowing money for your business is like any other loan—such as a mortgage or car—it will need to be paid back. There are other pieces to consider before signing at the dotted line and incurring more debt. Below are some pros and cons to business borrowing.

Pros

• Business loans are typically low interest—Compared to other finance methods, such as a credit card, business loans usually charge less interest. Pay close attention to the repayment terms, as they can vary.

• Your profits are yours—Commercial lenders are not entitled to any of your earnings. They are not investors in your small business. The money you make is yours to keep. Their business is in lending you the money and making their money from the loan interest you pay.

• You are still in charge of your business—Commercial lenders will review terms with you, but other than that, they are hands-off your business. They do not have any input on its operations or how you manage the funds you borrow.

• Interest payments may be tax-deductible—Whereas a credit card payment would not be, this type of loan is, and that is a huge benefit to your business because it reduces your taxable income.

Cons

• Commercial loan rates may fluctuate—Commercial loans are dependent on many variables, such as government policy and the market. You will not be enjoying a fixed loan rate and need to be prepared for raising rates, which will, in turn, cost you more money.

• Strict startup guidelines—Commercial lenders have many questions and need a lot of paperwork from startups—they want to protect their money. If your business is a startup, be prepared to provide a lot of information about your business, its model, how it will operate, a forecast of finances, etc.

• You will need to provide collateral—Commercial institutions will not lend you money just to be nice. They want to know that if your business goes awry or fails that they can recuperate their money. Therefore, you will need to put up some type of collateral for your loan, whether it be your house if you are a homeowner, stocks, or something else of value.

• Bank loans are different—If you read all about the pros and cons and commercial lending and decide it may just be easier to acquire a bank loan, know that type of borrowing affects the value of your business in a different way than a commercial loan does. It will fall on the liability side of your portfolio.

Sometimes it is necessary to borrow to provide a brighter future for your business. Just make sure to research the pros and cons of borrowing with any type of loan to know how it will impact your business. Don’t forget to read the fine print to understand repayment, the length of your loan, and its terms. 

Katie Robinette

Co-Founder

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