In most cases you should avoid taking on debt to start a business. Debt will create an ongoing obligation that will drain your cashflow and doesn't care if your sales had a bad month (or year). But we realize that many people do take out a loan to start their small business, so we are sharing the small business loan assumptions that we used in our Taconomics business case.
Type of Loans
- Amortized Loan
- Borrower pays the same total monthly payment amount for the entire term of the loan, but the amount of both principal and interest paid changes each month.
- Most mortgages and car loans are amortized loans.
- Fixed Principal Loan
- Borrower pays the same monthly principal amount for the entire term of the loan, but the amount of both the total payment and principal declines each month.
- All else equal a fixed principal loan will pay less interest than an amortized loan. But a fixed principal loan may not be available to you.
Notes
- Small Business Loans will generally have higher rates than what someone with good credit would get for a personal home or car loan.
- If you decide to get a small business loan, you should shop around and get offers from multiple banks and credit unions.
- You should not get a small business loan if you don't already have enough cash to pay the first year of payments.
- You should not start a business where a slow start or a few bad months would put you in a dire situation.
- You should not take out a loan if you are unsure if you'll be able to pay it back.
- You should start a business with a large margin of safety.
Example Terms and Schedules for an Amortized Loan and a Fixed Principal Loan: