September 16, 2021 | Last Updated on: January 22, 2024
DISCLAIMER: This article was written in 2021 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.
When small business owners think of hiring new employees, odds are they don’t associate the process with taking out a small business loan. However, at the same time, most small business owners wouldn’t think twice about the need to take out loans to grow a business. Hiring employees is often an integral component of growing a business – and loans are often a great solution for bringing on new hires to do so.
Hiring new employees is often stressful for small business owners and entrepreneurs. Not only is it a costly drain on a company’s cash flow, but it also increases the number of individuals who are dependent on the business’s success. Plus, it can be challenging to manage a large group of individuals who oversee completing different tasks. Yet, most don’t realize that there actually is a myriad of financing options for small businesses to take advantage of when hiring new employees.
In this article, we’ll discuss how loans fit into the hiring process, as well as how your small business can use them to grow in a successful and sustainable manner.
There are many different types of loans that can be used to hire a new employee. These include traditional brick-and-mortar bank loans, SBA loans, lines of credit, alternative lender loans, cash advances, and invoice financing. We’ll cover a few of these various options and how they can be used to hire new employees.
Traditional bank loans are typically what individuals think of when they think of loans. If your business has a strong credit rating and has been in operation for at least a few years with a strong cash flow, then a traditional bank loan is usually the way to go. These loans typically have the lowest interest rates, can be offered in high loan amounts, and have a wide range of term options (often ranging from 1 to 25 years).
The drawback to these loans is that your business has to have some sort of history of operation that proves it is a successful and sustainable enterprise. A good credit score and history are essentially a must to qualify for these loans. This makes the eligibility requirements far more stringent than many other options.
Traditional brick-and-mortar financial institutions can also provide your business with a line of credit. Lines of credit are a great resource for smoothing out cash flow and having a go-to source for funding for almost any need. In particular, lines of credit can be a great way to access business financing for bringing on a new hire. Typically, loans to bring on new hires will be short-term investments – as opposed to long-term loans for things like property – so a line of credit is an easy option. If your business has been in operation for a number of years with a strong track record, a line of credit is something you should consider regardless of whether or not you need a loan to invest in new hires.
The U.S. Small Business Administration (SBA) is a go-to resource for millions of small businesses across the nation. Not only do they have great development resources for small businesses, but the SBA also offers SBA loans – federally-backed loans that are more accessible to the average small business. The federal guarantee on these loans – meaning the government will cover a portion of the lender’s losses should a borrower fail to repay their loan (i.e. default) – allows lenders to loan to borrowers who have riskier profiles and lower credit scores. The SBA 7(a) loan is typically the go-to offering of the SBA for small businesses.
SBA 7(a) loans can be used for all sorts of things, including real estate purchases, short and long-term working capital needs, refinancing current business debt, and purchasing office equipment and supplies. They can also be used for hiring new employees!
Additionally, these SBA term loans come at really good interest rates (between 6% and 8%) and with terms of 3 to 25 years, allowing businesses a great deal of flexibility. Keep in mind though that larger SBA loans typically require a personal guarantee, which is something you will want to carefully consider since it can put your personal finances at risk if your business defaults. Larger SBA loans often require collateral of some form as well to minimize the risk to both the lender and the federal government.
Alternative lenders are a great resource for small businesses that don’t have a long-established history of successful operation and who don’t have a great credit history. After the 2008 recession, lending for small businesses contracted significantly on account of increased regulation and new standards at traditional brick-and-mortar banks. To fill this gap, alternative lenders stepped in to offer a series of new products for borrowers that don’t put them through the same level of scrutiny. This makes them a good option for startups as well, since startups typically will not have the kind of history necessary to acquire a bank loan.
Alternative lenders are not banks (i.e. they give out non-bank loans), which means they are not subject to the same regulations and levels of scrutiny. This allows them to make riskier loans to borrowers who are not as creditworthy. That said, all alternative lenders are different, so their standards and requirements will vary.
One thing to be aware of with alternative lenders is that they tend to charge higher interest rates to account for the level of risk they are taking on by lending to borrowers who don’t have long track records of success. The interest rate will also depend on whether or not the loan is secured. Unsecured loans will have higher interest rates since there is nothing of value protecting the lender in the case of a default by the borrower. Rates can be anywhere from 9% to 25%, with the higher end of the spectrum existing for riskier borrowers.
One of the benefits of alternative lenders is that many of them are easy to apply to. The loan application process is often online and doesn’t require the same level of documentation that a traditional bank loan requires since they do not put their borrowers under the same level of scrutiny. This means that they won’t necessarily require documents like your income tax returns, a business plan, etc., in order to decide whether or not you are eligible to receive a loan from them. This also makes alternative lending much faster. It’s not unusual to get a response and a loan application result in a matter of days – sometimes even hours! This means you can get funding quickly if your business is in a pinch.
Alternative lenders’ loan options are also typically very flexible with a lot of different options. While they won’t usually offer the kind of long terms that banks will (alternative lenders typically max out their term loans at 5 years, reducing the overall repayment time), they will have a myriad of loan products to choose from. These loan options can include lines of credit, term loans, invoice factoring, and merchant cash advances.
The result is that alternative lender loans are a great resource for small businesses looking to acquire funding to hire new employees, especially if they are looking for a short-term and quick loan. While there are drawbacks to alternative lending, the benefits are considerable, and they can be a boon to businesses that otherwise wouldn’t be able to obtain funding from traditional banks.
Now, you might be wondering, what are the advantages of taking out a loan to hire new employees? Well, the answer includes a wide range of benefits.
For one, it can enable your business to grow without putting a strain on your cash flow and diminishing your resources. Hiring employees with loans essentially expands your window of time or paying the employee for their work. They get the cash from the loan right away, but you might get a few years to actually pay it back to the lender. This allows you to grow your business without straining your financial resources and diminishing your cash flow – which can be dangerous for an otherwise healthy business. It is natural to think of taking out loans for most investments in the growth of a business – buying property, purchasing equipment, etc. – but most small business owners overlook that hiring employees is another form of investment for growth. Without a loan, you might not even be able to hire a new employee to grow your business, especially since bringing on new hires is not a cheap process. After all, hiring new employees is not cheap. You have to pay social security taxes, provide benefits, and train them, so it is certainly a big decision and a substantial investment.
Hiring new employees can be a great return on investment. If you are paying a 5% interest rate on your employee’s salary but they are bringing in loads of new business, revenue, and profits, then odds are that the cost of the 5% interest rate is worth it. Before taking out a loan for a new hire, you will want to be sure to carefully consider what sort of services that new employee will be providing and whether or not you think it will be worth it for your bottom line.
There are some risks associated with using loans to hire new employees. For one, only hiring employees as your company’s cash flow and profits allow it typically provides a steady and relaxed pace of growth trajectory for your business. Slow growth is often easier to sustain over the long haul than rapid growth, and these restrictions on your hiring can serve as a check on the rapid expansion of your business. Using a loan to hire new employees can remove this barrier completely, and before you know it you can be adding on multiple new employees. This can be dangerous for your business since over-hiring is a real risk many businesses face. As such, you will want to be cautious and measured in your approach to hiring new employees with loans. You don’t want to expand your business too quickly to the point where your growth becomes unsustainable and your business crashes.
Managing debt is also not easy and requires careful monitoring of your finances and cash flow. The last thing you want to do is default on a loan. Taking out loans requires you to pay close attention to the books and plan for the future carefully. Hiring an internal accountant or working with a certified public accountant (CPA) who specializes in small businesses can help keep your finances in order and ensure you can meet the bills at the end of each month.
Also, you should be sure to prioritize what you want to invest in. You can only take out so many loans, which means you have to choose carefully where investments will be most beneficial for your business. Maybe, instead of using a loan for hiring new employees, you think the additional cash flow would be put to better use buying some new equipment. This could very well be the case, so you will want to make sure you are considering all your options carefully – not just diving headfirst into hiring new employees with debt.
Hiring a new employee goes well beyond just paying their monthly salary, and it is not an easy process. HR resources are not cheap and the search process for new employees can cost a considerable amount of money. This is part of the reason many businesses have to take out loans to acquire new employees since they simply don’t have the cash flow to be able to foot the bill for all these costs.
The costs associated with hiring a new employee include but are not limited to:
Indeed, whether a small business is hiring a full-time or part-time employee, it is not uncommon for them to spend upwards of $2,000 just on finding an employee to hire in the first place. That’s before they even begin paying for their salary, benefits, and training. With this many expenses, it’s no wonder that many small businesses either can’t afford to hire new employees for their company or have to seek out loans to fund the effort.
Hiring new employees is not a cheap or easy process. It requires both time and money to do the job properly, and failure to invest enough of either of these aspects into the process can lead to disastrous results for small businesses. When you don’t have a lot of spare cash flow, each hire counts, so you have to make the most of each one.
However, if you have the proper approach but not the proper funding, small business loans can be a great resource for small businesses looking to bring on new hires. There are many options for obtaining the funding and typically the loan amounts needed are not large (as opposed to buying a new piece of machinery or property for example). So, if you think your business would benefit and be able to grow from bringing on a new hire but you don’t think you have the proper cash flow, consider taking out a small business loan. It can really help jumpstart your business and foster a new period of growth and expansion!
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