Income Artist

6 Questions To Ask Before Borrowing For Business

Author: Jimmy Barron
Published:September 11, 2022
3 mins 48 secs

Some people thrive on it, others will do everything they can to avoid it. Generally speaking though, borrowing is crucial to business growth.

Of course, there are right and wrong ways to do it. After all, as much as borrowing can be used for all the right reasons, it still creates a debt and this can result in disastrous consequences if not handled properly.

If you are thinking about borrowing for your business, let’s take a look at some of the key questions you pose before approaching a lender.

What’s The Long-term Plan?

One of the biggest mistakes we see businesses make is turning to borrowing to paper over the cracks. In other words, they’ll pay off other debts, they’ll keep the business afloat for a few more months, but they won’t have any real strategy for long-term success.

This is a dangerous game to play. Businesses should only borrow if they have a long-term plan that will ensure they can pay back the debt within a reasonable timeframe.

Sure, there are ways to consolidate debts – and borrowing might allow you to do this. However, you’ll still need a long-term plan.

How Long Are You Borrowing For? 

In a similar vein to above, this is another crucial question to answer. It’s not necessarily for the same reasons as we’ve just discussed, either. 

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After all, the longer you borrow for, the more expensive it becomes. The law of compound interest means that every day matters and while you may feel as though having a cushion of several years will make things easier, you’ll find that over time the interest you’ll be paying will be becoming grossly expensive. 

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Of course, there is certainly a sweet spot here – and you don’t want your repayments to breach what your business is truly capable of. However, resist the urge to borrow over long periods of time.

Are The Terms Going To Be Fixed?

In the majority of cases, the borrowing terms you accept will be fixed for a specified timeframe.

However, in some instances, you might be provided with an interest rate which is based off the national rates (in the UK, this would be the Bank of England base rate).

Suffice to say, this is where things can escalate quickly. If the economy does take a turn for the worse, and rates start to rise, your interest payments will as well.

The opposite can also occur and you can benefit from such changes, but, as we’ve seen over recent times, rate hikes tend to occur at a much more aggressive pace.

What’s Your Credit Score?

Just like individuals have credit scores, businesses do as well. In short, this represents your creditworthiness to lenders and is crucial if you want to get an efficient form of lending.

Those businesses with better credit scores are going to be handed more favorable interest rates. Ultimately, their borrowing is going to be cheaper, and it’s going to have less of a negative impact on their business.

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Can You Turn To A Secured Loan?

There are two main types of business loans – secured and unsecured. Unsecured loans are riskier for the lender, and as such, they tend to come with higher interest rates.

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Secured loans are where you put up an asset – usually your business premises – as collateral. This makes them a much safer form of lending, and as a result, the interest rates tend to be lower.

Of course, not all businesses have such collateral available but if you do, this could be a viable option in a bid to reduce your repayments.

Could You Instead Turn To Investment?

Borrowing is not the only way to raise money for business growth. You could also look at ways to bring in external investors.

Of course, this does come with risks. You are essentially giving up a share of your business in return for the investment. However, it could be a more suitable option, particularly if you are looking for a large sum of money.

Now, there are all sorts of guides which will walk you through the best ways to approach investment, but generally speaking, it’s important to ensure that you have a solid business plan in place.

Investors are going to want to see that your business is going to be a success and that their money is not going to be wasted. Furthermore, if you need the funds quickly, this might not be the route for you. After all, investment rounds do take time.