It is challenging to start and grow a business. It is a fact that at least 20% of all startups fail within the first two years of their inception. Half of all new companies will fail before their fifth birthday. Sobering facts aren’t they? Studies show that 29% of all startups fail due to a lack of funding. 

It has become harder, however, to acquire ample business funding. The US consumer debt is at an all-time $13.86 trillion high. The debt epidemic has made loans for people with bad credit a challenge. Debt, though, should not stop the passionate entrepreneur. 

Why do you need to get a business loan if you have no money?

Landscape designer turned millionaire Steve Griggs was broke after the recession hit. His car was repossessed and his house was in foreclosure. He owed over $80,000 as credit card debt. 

The now debt-free entrepreneur says that it took him years of persistence to find firm business footing and to kiss being broke goodbye.

If you are in Steve’s shoes, one of the easiest ways you can get your business on track is to find a business loan. A good business loan can close push your business past its startup phase to its maturity. You can use it to expand your operations, purchase equipment, for inventory and to increase your working capital. There are however advantages and disadvantages of a business loan. 

Pros of getting a business loan if you have no money

  • A business loan unlike angel or venture capitalist funding leaves you in control of your business
  • The loans have lower interest rates than other funding options
  • Business loan interest payments are deductible on tax payments
  • They can give you access to large amounts of capital and build your credit rating after repayment

Cons of getting a business loan if you have no money

  • The approval process is complicated and unfriendly to small businesses
  • Interest rates paid for the loan could fluctuate over time
  • Business loans require collateral 

Will getting a business loan make you more broke?

Yes, there are risks to business loans. They can leave you more broke than you were initially. You can, however, avoid this pitfall using the tips below;

Do not apply for too many business loans at once

If you are treading water from one month to the other and need to inject some finances into your business, you could be very tempted to apply for multiple loans at the same time. It gives you higher chances that one might stick, right? 

Well, true, but there is a considerable downside to this practice. To issue loans, banks have to perform a hard check on your credit rating. Too many credit checks will hurt your credit score. If you submit full business loan applications to several lenders, their checks will dent your rating by a few points each. The best approach is to first research each lender’s qualification criteria. Choose one or two suitable lenders and approach them for approval. 

Get acquainted with the cost of the business loan

When you finally are approved for that loan, you will be expected to pay it back on time. Banks have very confusing terminology when they are describing loan costs. One lender will simply tell you what their interest rates are, while the other will give you a solid repayment figure. 

A lack of clear communication can make it much harder for you to compare the competitiveness of your loan options. You, therefore, need to establish what your Annual Percentage Rate (APR) is. An SBA loan APR rate can range from 6.3% to 10%, depending on your lender. 

Take advantage of the lowest APRs to ensure that your loan is more comfortable to repay and mitigate the chances of going more broke through defaults. You will need to consider factors such as fluctuating interest rates. If you take a loan with a fluctuating rate, you could overtime fork out more in repayments, should interest rates change

Personal liability

Unlike personal loans that are often unsecured, business loans require collateral, personal guarantee, or lien. In the quest for quick financing, you might overlook the critical nature of this requirement. When you place your personal or business assets as collateral, you put them at stake perchance, there is a default on loan repayments. 

If you back the loan by a general lien, your lender has the right to take part or all of your startup’s assets to settle your loan account. Watch out, therefore, that you do not lose your car or home in the process of building your business.

Prepayment penalties

It might come as a surprise that a bank will charge you a penalty for paying off a loan too early.  They do this to ensure that the amount of interest lost on the early loan repayment is partly paid back. 

A lender might, consequently, charge at least 2% to 3% more on balance paid. To avoid this charge, negotiate with your bank and have prepayment penalties eliminated as a requirement. Standard SBA loans might also not incur any prepayment penalty fees.

The final word

There are many factors to keep in mind when applying for a business loan. You, however, cannot afford to neglect the tips above if you do not want to slide deeper into the abyss of debt. If in doubt, seek the assistance of a financial advisor before committing yourself to a business loan.

Thomas Cappetto is the director of public relations at Crediful, your guide to everything personal finance. When he is not fine-tuning communication within Crediful and connecting with other blogs, he enjoys long walks on the beach with his wife Shelly and their two sons Johnathan and Alexander.

Loan stock photo by SmartPhotoLab/Shutterstock