Starting a new business is a very exciting prospect for some people. Being your own boss and being able to do something that you are passionate about can be really great. However, it can be expensive as it is likely that you will have start up costs. These will obviously vary a lot depending on what you are doing. However, many new business start with a loan so that they can buy what they need. There are pros and cons to doing this.
Advantages of a loan
If you have a really great business idea and are really passionate about starting it but have no finances to start up, then a loan can help. You will need to put together a business plan for the lender to show them your projected income as they will want to make sure that you will be able to afford the repayments. It is important to be realistic here as if you cannot afford the repayments then you will need to think about whether the business is a good idea.
If you wait and save up before starting the business then you could miss the gap in the market that you have seen. You may also just run out of enthusiasm for the business or get distracted by other things. Without getting a loan at all you might be able to start really small but you may not be able to grow if you do not have any money to spend on things.
You may be able to apply for a grant though. It will depend on what type of business you are setting up and where. Some councils will have grants available, particularly if you are starting a project that will help the community or taking up an empty shop on a struggling high street. It is worth checking for these grants as they could mean that you will not need to borrow money or that you will not need to borrow so much.
Disadvantages of a loan
The problems with all loans is that they are expensive and they have to be repaid. The cost of the loan might be justified with the amount of money that you can make from the business. As long as you can make more than enough to cover the loan repayments then you are profiting compared to not taking the loan and not being able to make any money at all. However, if you are not doing well and not taking much income then it may not be worth it.
A loan will also tie you in for a period of time. It is possible that the repayments could take a number of years or even a decade or so, depending on how much you borrow. This is obviously not the case for short term payday loans but for larger loans, the term could be significant.
This is a big commitment and it means that you will need to be sure that your business will be making enough money for all of this time to afford it. If your business idea is something that is currently on trend then you will need to think about what adaptations you might make in the future if your popularity goes down and the trend disappears. Also think about what you might be doing in your personal life in the future and whether you will still want to be running the business or if you might have less time to commit to your career.
You also have to make a loan repayment every month. This can be a big commitment, particularly if the loan was large. You will need to be sure that you can do this or else you will end up paying even more money back as you will have charges or fees to pay as well as the interest. You may find that the business has to go without things in other areas to afford the loan repayments and so you will need to do what you can to make sure that you generate enough income to afford them, all of your other expenses and have some money left to pay for other things. Ideally you want to be able to pay yourself as well.
It can be difficult to work out whether a loan is the right idea for your business. As you can see there are advantages and disadvantages to taking out a loan for your business and you will have to think about it in light of what you are specifically doing and whether you have any money to fall back on. You might want to make sure that you have some money to be able to cover repayments if you need to or to cover other expenses. Doing an accurate business plan is really important as well as this will allow you to see what projected income might be form the business. It can be tempting to be very optimistic, especially if you have a business idea that you think is really good, but try to be as realistic as you can as you may find that things are not quite as rosy as you predict. Have a back up plan in case things take longer to get established than you have predicted.