Why Taking Out a Loan to Start Your Dream Business Isn’t Such a Bad Idea

Chrissy Weems

Starting a business requires initial capital, perfect timing, a lot of research, and a very sizeable dose of luck. Failing to meet any of these conditions can be detrimental to the long-term success of the company. Generally, the hardest criterion is obtaining the necessary investment as most businesses require purchases of initial equipment, legal and start-up fees, employee costs, and other fixed expenses like prepaid rent and utilities. Thus, obtaining a loan could be one of the best options available to those who may lack the necessary lump sum of money. Further, there is an entire break-down of all the positive consequences of taking out a loan!

Builds Credit

Credit scores matter. Not just because successful entrepreneurs like Chrissy Weems know so, but because they quantify someone’s trustworthiness. Positive spending histories can help obtain business partners, get involved with larger projects, and take out heftier loans in the future. Thus, when a business is first starting, the owner might get a chance to (re)build their credit through financing which lays the foundation for any future growth.

Great Offers

As financing companies and large banks compete with one another, the party that gains the most are consumers. By driving down each other’s interest rates, these lenders make it possible for prospective businessmen to take out a loan and actually make money on it! How? Time value of money. The rule of thumb states that money someone has right now is worth more than the money they will hold in the future. This is why banks expect more to be repaid through loan interest. However, with low yield, businesses can take out a loan and pay it back fast enough to actually benefit from the time value of money concept.


In case someone’s business is just starting up, banks will, by default, not have a lot of trusts. To compensate for that lack of faith, they will require the borrowers to classify certain assets as collateral. For example, failing to make a payment means that someone loses their company’s truck. Although it sounds intimidating, it can be a motivational factor. After all, not a lot of things will push someone to meet their sales expectations as the fear of losing assets or having to pay high late penalties.

Opens Many Doors in the Future

The first point mentioned that building a respectable credit can be useful in the future. One of the ways is that a good relationship with a major lending company can be fruitful infinitely. If someone takes out a loan that gets repaid in time, they will be a welcomed customer in case they need any more loans later. Since growth often requires expansions like purchases of additional equipment, openings of new locations, and so on, being able to get additional loans could be important.

Emergency Funds

If the initial cost of business is $100,000, hypothetically, the entrepreneur should have at least 1.5 times that amount. This is because of all the unforeseen consequences that can occur. Unless someone’s experience matches that of Chrissy Weems, they may not be aware of countless issues that often come up with manufacturers, business partners, tax implications, shipment dates, legal perspectives, and more. All of those can facilitate a lack of revenue and one will have to fall back on their original capital that might already be spent. This is why it is important to have a cash-based emergency fund that contains liquid assets. So, a portion of the original capital should be left aside and a loan should be taken for any differences. Postponing the loan process is not beneficial as it will also delay the delivery of the capital that may be needed fast.

Not Too Many Other Options

Unless someone intends to do an initial public offering and sell stocks in their corporation, raising money can be a nightmare. Small business owners could, theoretically, look to their friends and family to help with the cost, but this will not happen if they do not share the vision. Also, letting outsiders aid with expenses may be leveraged with a high-position within the company. This often results in a long-term loss of authority that no business owner wants to go through. Hence why a lot of corporations always leave the owners with 51 percent of outstanding shares. Therefore, getting a loan could be the only way to sidestep this money-borrowing stage.

Skepticism related to financing is often justified due to factors like high APR, long repayment period, and unreasonable collateral. At least that is what applies to personal loans. With larger, business-starting loans, however, all of those factors should be outweighed by the potential of making money. If one is profitable, they will cover all of their liabilities without paying much thought to it!

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