How to get a business loan to start a new company or grow an existing one?

Many entrepreneurs I speak to are scared of taking out business loans.

It’s either a bitter lesson from personal experience, or the horror stories they heard from friends, family, or a fellow business owner.

But there’s a reason business loans have been around for centuries.

In fact, many big multinational companies, wealthy people, and even governments thrive on loans.

Like I often tell my clients, a business loan is like fire; it can help you or hurt you. It all depends on how well you know how to use it.

A good loan can help you build a successful business. But a bad loan can hurt and crash your business.

In this article, I’m going to show you when and how to use business loans to your advantage to start or grow a business.

But first, let’s look at the upsides and downsides of taking out a business loan.

The upsides:

A loan gives you financial leverage; it gives you the ability to use other people’s money to boost your business.

It’s like leasing a car or renting a house instead of buying it.

Rather than rely on your own funds to start or grow your business, a loan is an opportunity to borrow, lease, or rent other people’s money.

Besides being more convenient, loans can be cheaper than using your own money.

This is exactly why many wealthy people and big companies prefer to use loans even though they can use their own money.

Taking a loan also gives you more flexibility and control.

Why give away 40% equity ownership in your company to raise $1 million when you can just borrow the money, only pay interest, and still own 100% of your company?

Don’t forget, a loan doesn’t always have to come from a bank.

Any money you raise for your business – from business partners, friends, family, or investors – can actually be structured as a loan.

The downsides:

While loans can have their benefits, the person who gives you a loan expects you to pay it back – very likely with interest.

This means that you bear the full risk of paying back the loan, whether your business succeeds or fails.

This is why some investors who give loans (like a credit company or bank) will often ask for collateral or guarantees before they give you a loan.

A collateral or guarantee ensures that if you can’t pay back the loan, the bank (or creditor) will have something valuable to fall back on.

Another downside of loans is you may have to start paying back small parts of the loan immediately.

If you have a business that generates consistent cash, this shouldn’t be a problem.

But if you’re investing the loan in a business that needs time before it starts generating cash, then the loan may turn out to be a bone in your neck.

When should you use loans for your business?

We have trained hundreds of students on fundraising for business, and knowing when and how to use business loans is a critical part of what I teach.

In my experience, many small business owners who take out a loan are actually playing with fire without knowing how to tame it.

In our signature Funding Masterclass, I explain exactly how you can use loans to your advantage, and avoid the expensive mistakes that could make you a victim of bad loans.

I’ll share 3 of the guiding rules here:

Rule #1: A loan should not be used to start a ‘risky’ business

Remember, a loan has to be paid back (with interest).

If the money must be paid back, then it doesn’t make sense to use a loan to gamble, take big risks, or invest in a very uncertain business.

Many people who have been burned by loans used the money to start a business they had no experience in, or they used the loan for an untested new product or business model that’s not been validated by market demand.

This is one of the main reasons banks don’t like to give money to ‘idea-stage’ or startup businesses that don’t yet make sales or have paying customers.

Instead, loans usually do well with businesses or projects that can quickly generate cash to pay back the loan and interest.

Rule #2: A loan should be productive and cover its costs

Again, a loan is not free money. You have to pay it back (with interest).

Even if you take out a loan and just allow the money sit in the bank, it’s still going to accrue interest and cost you every day.

That’s because, with loans, time is literally money.

So, any loan you take has to be productive. It has to work hard enough to pay its own costs (interest).

I often see business owners who take out loans only to invest the money in activities or assets that don’t add any real value to the business, or generate any cash (directly or indirectly).

That’s why those loans often end in tears.

Bottom line: if a loan will not help your business grow or generate more sales, it’s just not worth it.

Rule #3: Only take a loan you can afford.

Every loan comes at a cost.

But unfortunately, some business owners take out loans without understanding the true cost of the money (the interest rate and fees that come with the loan).

Sometimes, the interest rate and fees may be too expensive for your business.

As a result, while your business may be making more sales and serving more customers after you take out the loan, an expensive loan will eat deeply into your profits.

In our experience, many business owners knowingly accept high interest rates because of their hyper-optimistic and unrealistic expectations in the potential of their business.

And besides high interest rates, the payback period and terms of the loan (extra fees, variable rates, etc.) can also put you in trouble.

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