Borrowing Money to Start a Business: Responsible business borrowing can be the best way to achieve your vision for your new business.
If you are willing to adopt a growth-focused business model, you must obtain the necessary funds from time to time. This will work as a supplement to the working capital and will enable you to achieve business goals that you’ve only dreamt of.
And in this guide, we will take you through why you should borrow money when starting a new business.
Let’s dive in!
Why Should You Borrow Money?
Are you in two minds about borrowing money to start or boost your business? Here’s why you should consider doing it.
1. Borrow Money To Cover Business Expenses
When starting a new business or expanding an existing one, you need proper cash flow to cover the costs. This is especially crucial for new businesses trying to make a name on the market.
As a new player on the market, you might often find yourself in a pickle trying to pay the suppliers on time. Sometimes delays in customer payments can create a gap, and you might notice that you are low on working capital.
Take another instance. You might have an existing business and are planning to expand. In that case, you will need to spend on inventories, space, and paying the new staff you hire. And this might burn a hole in your pocket.
To tackle this situation, you can borrow money. Seasoned players will tell you that borrowing in the short term with a regular installment cycle is a part of a well-rounded business strategy.
It gives you plenty of scopes to cover your business expenses without worrying about the working capital.
2. Generate Business Income
If there’s an excellent business opportunity, you must seize it! And you need to have the right amount of funds at the right time to ensure that you can seize such opportunities. This is what will lead your business to success. Unless you can grab all the right opportunities, your company might face stagnation.
There might be a large order or a chance to improve your product line; borrowing money to meet these needs will help generate more income eventually. But in order to do that, you will require the necessary fund or capital.
It is understandable if you do not always have the requisite fund to invest in new opportunities. And that is when you can borrow money to meet your needs. In case you are doubting if borrowing money is a good idea to enhance business income, let us clear your dilemma.
Basically, you will need to evaluate the opportunity cost. Your decision to borrow should always be measured against the cost of missing the opportunity to make more money. And we can assure you that the price of short-term loans is a lot cheaper than missed opportunities.
How To Find The Right Lender?
Now that we have advised you to borrow money, it is also our responsibility to show you a way to do it safely. Let’s take a look at how you can find suitable lenders who can help your new business grow.
Not All Lenders Are Equal
Finding a mortgage lender is now easier than ever. But to find the right one, there are a few things that you should keep in mind. We suggest starting with credit unions or banks with which you already have an account, as they will be willing to provide you with the best deals.
You can also look online to find the right mortgage brokers or lenders. Always make sure that you are going through user reviews to understand the experience of other borrowers.
We suggest that you do not fix your eye on a particular lender without conducting proper market research. Take several quotes from different lenders to compare their interest rates. You should choose the one that offers the best deal.
Otherwise, the total interest that you end up paying over the life of the loan will amount to a lot.
Pro Tip: Always talk to your friends and other professionals and take their advice. They might have worked with a lender who they trust and can refer you to them.
The Advantages Of Borrowing Money To Start A Business
Many new business people now opt for debt financing or borrowing money instead of bringing in new investors to the company.
When you bring in investors, they will have a say in how the money needs to be spent. An investor might want to see quick results! And, if you have other visions, your interests might clash.
Borrowing money from a lender, on the other hand, offers you higher flexibility and greater control over how to spend the money in your business. Banks will surely ask what you will use the money for, but if you pay the installments on time, they will not interfere.
Also, lending money does not pressure you to achieve business growth immediately. As long as one is able to pay the monthly installments on loan, they can take their own sweet time to reach their business goals.
2. Lower Interest Rates
Business loans can be a savior in times of a financial crunch. Whenever you are taking out a loan, it is best that you apply for one that offers a flexible interest rate. Wondering how that is beneficial? Let us break it down for you.
As you start repaying the loan, with every installment payment, the principal sum borrowed decreases. The interest is no longer levied on the initial amount lent. And a loan with a flexible interest rate plan will only charge you interest on the remaining amount that you have to pay.
Interest rates offered by banks and other government bodies are generally quite low when the economy is not functioning well. That is a good time to take out loans as banks try to give loans at low interest to boost investment spending.
Keep an eye out, and get in touch with the right money lender who can offer you a loan at the least interest rate.
3. Establishing Credit History
In order to get better deals from vendors and to get quality financing, businesses need to showcase a good credit score. If you are a new business, the only way to improve your credit score is by creating a credit history.
And to create a credit history, you will need to borrow, spend and repay loans. To be honest, a good credit report can take your business to new heights. When you take loans or borrow money for a business and repay them diligently on time, you create an excellent business credit track record.
Unless you have borrowed money before or taken out loans from banks, creditors or lenders have no idea if you are going to hold your end of the bargain. So, establishing a credit history is essential if you have to get suitable and timely financing.
Lenders must see that in the past, too, you’ve taken out loans and repaid them on time.
4. Tax Consideration
In most cases, business loans enjoy amazing tax considerations because it is money that you are paying back to the lender. The business loans that you generally take from online lenders or banks are tax exempted. However, there are some exceptions.
In case your debt is partially or fully forgiven, in which case the lent amount becomes yours, it becomes taxable income.
While this is the case in some countries, the rules might be slightly different in other countries. In certain countries, the interest component of the loan or borrowed money is eligible for tax deductions. The reduction is added as an expense to the business income statement.
By the end of the year, you will see that you have saved a considerable amount on business tax liability.
5. Known, Fixed Monthly Payments
Whether you are taking out a short or long-term loan for a new business, you will only have to make known, fixed monthly payments.
The interest rates won’t vary unless you opt for a flexible loan plan. Even in that case, you will have proper knowledge about how much you have to repay every month. The pay is not variable, and you do not have to worry about paying more or less amount every month.
During the repayment period, you will know how much you need to pay as an installment at the beginning of every month. That would enable you to plan all business expenditures without having to worry that your installment rate would suddenly shoot up.
This is a great benefit for businesses as it allows you ample scope to plan company expenditures like a pro.
Smart and flexible business borrowing can take your company to new heights. Make the most of the funding options and ensure your new business enjoys maximum growth in the coming years!