A Business Loan may be just what your business needs but be careful. While it could help your business grow and develop, it could also become more of an expense than it’s worth. Take the time to sit down and crunch some numbers.etting a business loan may be a great idea and it might be a very bad idea. Look at our national debt: it is trillions of dollars. Why did we let ourselves acquire such a tremendous debt? We are an economy that has prospered on borrowing. We borrow now and pay later. We ride on our hopes for the future. This can be helpful in many ways, but it often creates financial hardship. 

If you are a business, and you are looking at a loan, you had better have a good plan. Following the United States plan of borrowing money until you are trillions of dollars in debt is probably not a good business plan, even if you are Bill Gates. As a business owner, you undoubtedly want your business to grow and prosper. The question is, how are you going to Finance this growth? Some companies sell stock to acquire the necessary Capital, some sell bonds, and some smaller businesses have to take out a business loan.

When looking to take out a business loan, there are many things to keep in mind. Here are a few you should pay especial attention to: Have a business plan. Your business loan should help your business grow or satisfy some need. Taking out a loan for every little thing that your capital cannot cover and that you just want could put you into serious debt. You should know how your investment is going to impact your company. You should know how much you will be able to pay every period and how long it will take you to pay off the loan. And, once you have this you should assess how much better or worse off you will be, having acquired the loan.

An important consideration when considering whether you will be better or worse off with a loan is the Interest rate. As a new business, you may be faced with higher interest rates and, depending on the country’s financial situation, this could be significant. If the interest rate is high, you may find the majority of your initial payments going toward covering the interest. The creditors are taking on a risk too and this is where they make their money. When interest rates are high and the majority of your payments are going toward paying the interest on your loan, you may need to step back and weigh your options. How important is it to take this loan now? Would saving money or selling some capital be a better option? How will your business be able to respond if the economy takes a turn for the worse?

When done wisely, getting a loan for your business can be a great financial move. It may allow you to grow more quickly than your competition and earn a larger following. It may allow you to move to a new location. It may also prove to be a large liability and eventually prove to be a poor decision. Regardless, it takes two parties to establish a business loan. On the other side is the creditor and just like you, they are looking out for their best interests.

A creditor is taking on a large risk when agreeing to a loan. As a result, they take great care in establishing your credit. They rely on something called the five “Cs”: character, capacity, capital, collateral, and conditions. In Warren, Reeve, and Fess’ Corporate Financial Accounting, they describe these Cs clearly. In short, character refers to the likelihood that the loan will be honored. Capacity is the ability to repay the loan. Capital refers to the value of the business. Collateral is the value of assets that the business is willing to give the creditor in the event that they cannot repay the loan. Lastly, conditions refer to the current economy and expectations– it may be very difficult for a business to repay a loan in an economic recession or depression. With that said, as a business you should take at least as much care to determine whether taking out a business loan is in your best interest.