Should You Take Out a High Interest Rate Loan to Increase Sales?

high interest small business loan
Is high interest loan really needed to boost sales?
Almost every small business will go through what I call “no man’s land” where they are stuck in a very difficult position and unable to grow. There are different inflection points for every business, but today I am focusing on the business that has seen quick growth and gone from $0 to $150,000 in annual sales in the first 18 months of business, but now needs capital to grow from a startup to a small business.

The situation I just described is very common, and there are a number of challenges that often come up at this point in the business that make it very difficult to secure a loan from a traditional bank. Let me outline 3 major challenges that make traditional financing difficult, and then suggest a few possible short term solutions that can help you reach that next level.

Challenge #1 – Less Than 2 Years in Business

Your first challenge in this scenario is that you are a young company. Business moves much faster than banks do these days, because in two years you can create a huge company from nothing, but in order for banks to offer an SBA loan they want to see at least 2 years of past financials. Other forms of financing want to see 2 years of operations from you as well before they risk putting any cash behind you.

Here is the problem. You can just coast along for another 6 or 9 months until you have 2 years of business records, but if you have been unable to grow for the last 6 months because you lacked adequate capital, the banks are going to get scared away by your financials because it will appear that you can’t grow.

Challenge #2 – Business Credit Still Based on Individual

For early stage businesses with less than $1,000,000 in annual sales, your business credit will still be based on the business owner’s personal credit history. Unfortunately I have seen many businesses start to take off only to be stalled because the business owner has a past bankruptcy or a credit score below 650.

Challenge #3 – Sales are Too Low

The last challenge is that your sales are simply too low to qualify for a traditional bank loan or angel investment. This is difficult to hear, but it is true. This situation is very similar to recent college grads who are searching for a job and keep getting denied because they lack experience. How are you supposed to get experience if no one will give you a job?

In the same way, how are you supposed to increase sales if no one is willing to give you the capital you need to expand? This is an unfortunate truth that most business owners will face at some point.

Short Term Solutions

So what are some short term solutions that can help you reach that next level so that you can qualify for traditional financing?

The main question you will keep coming back to is, “Should I really take on debt purely for growth?” The reason you need to ask this question is because if your business is successful and growing you will be able to find someone willing to lend you money, but it will probably come at a high price. Here are 3 options:

1. Risk Your Assets – You might be able to borrow from the equity in your house, or from your retirement account. Additionally, you might be able to find a loan if you are willing to pledge your home or car as collateral. The question is, are you willing to risk it? I say this is a short term solution because you might be able to borrow $75,000 from the equity in your home, and that $75,000 might help you increase your annual sales to $500,000 which will probably take you to the level you need to be at to secure an SBA 7a loan from a traditional bank.

2. High Interest Rate Loans – There are a number of ways to secure high interest loans including credit cards, peer-to-peer lending, and other individual lenders, but you might be paying 20% annual interest. This might mean that you forfeit all of your profits to pay these high interest rates, BUT if it helps you grow sales to the point that you can secure traditional financing at 6% interest rates, then it is probably worth giving up 6 to 12 months of profits in order to set yourself up for success in the future.

3. Rope in Your Family and Friends – Lastly, you can rope in your family and friends to either lend to you directly or co-sign on your loan applications. Again, risking relationships for the growth of your business can be a high price to pay, but it can pay off if it helps you reach a level where the business can stand on its own.

In conclusion, yes in many instances it is worth it to take out a loan simply to grow the business even if it means you are less profitable for a time. If you want to turn your startup in a thriving small to medium sized business, then you will need to take some big risks. Good luck!

About the Author: Adam Hoeksema is the Co-Founder of ProjectionHub. ProjectionHub is a web application that helps entrepreneurs create financial projections without the need for a PhD in spreadsheet modeling.

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