Should You Take Out Loans for Your Business?

Is it a good idea to apply for a business loan? Learn more about small business loans and how they can help finance growth.

Should You Take Out Loans for Your Business?

Is it a good idea to apply for a business loan? Depending on the company's objectives and the current financial situation, the answer could be “yes”. Business owners should ask themselves how they are going to finance business growth and what other areas may require additional capital. Both personal loans and small business loans are effective ways to cover expenses to get your small business off the ground. Your choice may depend on how much money you actually need, where you can get the lowest interest rate, and whether or not you want to put your personal credit on the line.

Expansion is a great reason to take out a loan for your business. The extra funds can help you expand your inventory to meet increasing demand, cover staff shortages, improve your work environment, or upgrade your equipment. But you have to prepare yourself and your company to get the money and make sure that the loan is right for you. Required documentation usually includes a detailed business plan and proof of warranty; comprehensive financial records, such as income tax returns, personal and business bank statements, loan history and balance sheet; and legal documentation, such as franchise agreements, business licenses, and registrations.

When you borrow money for your company, there is a risk that the company will not be able to repay the loan. Banks and credit unions offer secured loans that are usually easier for startups to obtain and have lower interest rates than unsecured loans. According to Logan Allec, public accountant and founder of the personal finance site Money Done Right, local financial institutions are an ideal place to start looking for a business loan. Include details of your company's profits and expenses, your company's cash flow statement, and your plan to repay the loan.

Remember that a big part of your sales job involves persuading your banker to trust your management intelligence and your ability to build a strong business (and pay back the loan). For reference, the current average APR for a two-year personal loan is 9.58%, while the average APR for a credit card is 16.30%, according to the Federal Reserve. It's a loan against your company's future profits that you repay as a percentage of credit card sales. Having a purpose for funding will make your loan application stronger, since your lender will want to know exactly how you intend to use the money and why you are applying for a loan.

Be specific about your intentions regarding your loan and the health of your business, and be careful not to seek funding to hide unresolved issues. Unlike the “green light” scenarios described above, you should be careful not to use a loan as a short-term solution to a long-term problem. Obtaining a small business loan can provide your business with the funds it needs to get started, expand, or cover everyday expenses. When your company applies for a loan, it is responsible for repaying the amount borrowed, plus interest, according to a set schedule.

Some small business loan lenders will require you to secure the loan with an asset, while personal loans are generally unsecured. In reality, there is no strict rule about the use of the loan (although, in general, you'll need to explain your plan for using the money when you apply for the loan). However, before you apply for a personal loan, you should make sure that the lender has no restrictions on using the money for business purposes.