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Key takeaways:
- When you need to fund business growth, your decision on whether to take out a loan or tap into savings depends on several factors.
- Business loans help build credit history that your business might need someday.
- Weigh the costs of a loan against the risks of missing a business opportunity or depleting your savings to see which option is best.
What’s the best way to fund your company’s growth? Should you take out a loan or tap into savings to cover the costs?
Both approaches have advantages and risks. The one that's right for your business will depend on several important factors.
How to decide if you need to take out a business loan
Consider these 3 questions.
1. Do you need to build business credit?
The long-term success of your business depends on having access to future funding, which means you need an excellent credit history.
If your business is just a few years old, you may not have had the opportunity to establish a strong credit history. This can make it difficult or even impossible to obtain larger loans in the future. It could also increase the interest rate you need to pay for smaller loans now.
If you think you may need to apply for larger loans within the next few years, start building that credit history now. One of the best ways to do so is by applying for smaller, short-term loans. Then be sure to make your monthly payments on time.
If your business already has an established, strong credit history, you may be better off tapping into savings for your current capital needs.
2. Does the return on investment (ROI) outweigh the cost of the loan?
Every loan costs money. However, those interest payments might be worth it if the loan will help your business grow.
To determine whether a business loan is right for you, calculate the anticipated ROI of the loan. Will you be earning a profit that is high enough to make the interest payments worthwhile? Will the loan help you generate additional revenue for your business? Will the money help you expand your product line or open a second location? If so, the interest you pay for a loan may pay off in the form of extra revenue, increased market share, or higher profits.
3. How large is your business savings account?
If tapping into your savings to fund a business venture will leave your account depleted, it may be best to take out a loan. While it’s always important to have a safety cushion, if you wait until you save up enough money to cover an expense, it could mean losing out on a prime business growth opportunity.
On the other hand, if using a portion of your savings for a business expansion will only make a small dent in your funds, this may be the better option for you. Make sure to leave enough in your account to cover several months of business expenses, your quarterly taxes, and the occasional cash-flow issue.
