When you’re just starting a new business, one of the biggest questions is financing.

This topic ultimately leads to the question: “Should you go into debt to get your business off the ground? And, if you do, how good or bad is it for the long-term?”

The truth is that only you can decide if your business venture is worth the risk of going into debt, but there are pros and cons either way.

Tax Benefits

One of the few benefits of going into debt as a small business is the tax implications that come with it. Not only does owning a business come with a handful of nice tax bonuses, but paying off business-related debt can earn you tax deductions in the form of “business expenses”.

Credit Score

A big negative to going into debt is that it can cripple your credit score and make you a financing nightmare going forward.

Most business owners owe anywhere from $20,000 to $200,000 in debt, so you can see how that might make a bank nervous.

Even if you don’t go fully into debt, you’ll probably end up maxing out your credit limits to avoid falling behind. Either way, you’ll be stretched very thin financially and sometimes a maxed-out credit card is worse for your credit.

The best option, if you plan to go into debt, is to build a solid credit history beforehand. That will prove that you’re responsible and show that the massive hit to your credit score is just a result of your business start-up.

Apply for a Loan

As mentioned above, damaged credit scores will affect your ability to get a loan. Most of the time, a bank or lender will understand the situation and offer you a business loan. The worse your credit, the higher your interest, so a good credit score ahead of time comes in handy.

Interest Can Be a Killer

Going into debt will mean higher interest rates on everything—from the initial bank loan for your business to purchasing a car or home. Aside from having good credit when you apply for these loans before you go into debt, there’s another choice.

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It may sound simple but save money. The best way to get a lower interest rate, especially on your business, is to put more cash toward it upfront. That will lower your long-term cost and drop your compound interest.

Prioritize Your Debt

Whether you go with that higher interest option or don’t need to take it, going into debt for your small business will mean owing lenders. The bad thing about owing anyone or any institution is that they expect consistent payments, so you need to make sure your business doesn’t fall behind.

Going into debt is a personal choice and should depend on the statistical success of your venture because having one bad month of sales in certain businesses will mean complete bankruptcy. 

However, you always have the option of talking to the lender and making some kind of deal for lower payments, if you can afford it and they’re understanding.

With that said, though, it’s important to prioritize your debt. After the lenders, make sure you pay your employees before any of the supply chains. They might be upset, but you can fix that later. Without staff, most businesses can’t make money and that’s how you pay everything.

Refinance to Consolidate Your Debt

Every business owner has one huge option as a last resort: Refinancing. While you hopefully wouldn’t get to that point, if you have enough debt and have your back against a wall you can refinance your debts.

Refinancing your debts consolidates what you owe into a single number each month, which can save you money in the long run. While it shouldn’t be done without doing your research, it can be a viable option to save your business.

Refinancing will usually allow you to choose a lower overall interest rate, which will save you money over time. It will increase the length of time that you’re paying back the loans, but it can give you enough financial space to climb out of the hole.

The other main benefit of refinancing is to rejuvenate your credit score. If you refinance your debt, it will effectively lower how much credit you’re utilizing and lower how much of your credit line is used.

Refinancing your debt can be helpful if you’re in a bind financially and should be considered if your business owes a lot of debt but try to avoid getting to that point.

Make Sure You Have a Fall-Back

One of the biggest mistakes that many first-time business owners make is jumping in feet-first with no parachute. In this case, the parachute is a backup plan if your business venture fails. While this isn’t something anyone wants to consider or admit, businesses fail all the time.

No matter what area of work your business falls under, everything comes and goes in cycles and you never know if your product or skills will be wanted or needed in 5 years. You also can’t predict the weather, natural disasters, or pandemics—all of which affect sales and functionality. 

A tornado could destroy your building, a winter storm could freeze all of the pipes and shut down your business for days or weeks, and a pandemic could quarantine your area for months. Through no fault of your own, your business might fail.

Exhaust Other Options First

The last major downside of debt is the stress that comes with it because juggling debts and payments can be exhausting. Debt isn’t for everyone, so make sure you’ve got a good head on your shoulders and won’t collapse under the strain before you consider it.

In the modern era, crowdfunding has become a good source of start-up income for many ventures. Make sure to do your market research and see how you would format a successful campaign for your particular business. 

The other methods of avoiding going into debt were mentioned earlier: bank loans, maxing out your credit cards, or even borrowing from trusted friends. These are all preferable to going into debt if you have the option.

Final Thoughts

There are positives and negatives to going into debt and it shouldn’t be done without a lot of consideration and effort beforehand. From credit and taxes to stress and refinancing, there’s a lot to think about. 

Just know that going into debt isn’t the end of the world if you know what you’re doing—good luck!