Pros and Cons of Taking Out a Business Loan to Hire Employees

The most important asset of a business is, you guessed it, the employees. There’s a reason all large corporations have an HR department. Your employees can make or break your businesses, so you have to be very careful when hiring a new one.

In this article, we’re going to discuss the following aspects of hiring:

• Why should you hire an employee?
• What are the costs associated with hiring an employee?
• Benefits of taking out a loan to hire employees
• Drawbacks of taking out a loan to hire the said employees
• The correct way to finance your hiring costs
• Types of loans and how much they will cost you

Why should you hire an employee?

Let’s assume you are an offline business that sells tea leaves from your shop downtown in the market. (Note that this is a random oversimplified example, but we are sure your business would face similar problems too.)

You buy the loose tea leaves from a vendor and then package them yourself and sell it to customers. If you want to grow your business, you need to increase your offline sales.

You have two ways of doing it:

• You can either go door-to-door trying to sell your leaves.
• You can hire an employee/team of employees to go door-to-door trying to sell your leaves.

Doing it yourself is the cheapest way. It is also the most time-consuming. You have to take the time out of your business and learn the sales skills yourself. It will also mean you won’t be able to attend to the customers who walk into your shop. It will take you weeks just to get started, and your competition isn’t waiting around.

Alternatively, if you hire a ‘sales guy’ who already knows how to sell and whom to sell, things would be much easier. The salesperson would go door-to-door with your samples, take orders and close the deal. The more expert ‘sales people’ you hire, the more sales your business generates and the faster your business grows. If you could hire ten guys, your sales would grow 10x.

Large corporations have thousands of these people. This explains how they can post large profits every year. The catch is that a good sales guy will be expensive. You can hire a cheap one and train him, but it will take years to develop the skills needed. If you have the money to hire talented employees, your business will grow exponentially every year. You could use the profit to hire more employees the next year, and so forth.

But what if you don’t have the money to hire talented employees as your competitors do? That’s when you apply for business loans.

What are the costs associated with hiring an employee?

Hiring employees is not cheap. Good employees don’t come easily. How do you decide how much to pay them? Each role pays differently. Sales and Marketing guys demand much higher compensation compared to accounting or HR.

Continuing our example of hiring sales guys:

You need to snatch the top performers before your competitors, and to do that, you need to pay them at least 30% more than they were previously earning.

As long as you compensate them well and keep their morale high, they will stick with you.
A typical salesperson should cover four times their cost. So if you’re paying a salesperson a salary of Rs 1 lakh every month, they should at least fetch you more than Rs 4 lakh in profit in the same period.

This rule applies to all roles that make you money directly. Lawyers, Stock Traders, Consultants, Bankers, Insurance Agents are all paid using this thumb rule by their respective firms. If you get more value than this, some competitor might steal them. If you get less than this, then it’s time to assess what you are doing wrong.

A typical hiring process looks like this

• Spend your time and resources selecting people you wish to hire.
• Then, you have to spend time interviewing them.
• Hire them if you think they are the right fit and have the relevant skills.
• Spend your time and resources training them about their new job and duties.
• It takes them some time to adjust to the company culture.
• They start delivering results, or it’s a bad hire.

As you can see, it takes a lot of time and effort to hire employees. If you get the wrong one, all that effort is wasted. The more important the position, the more significant is the loss suffered due to a bad hire. So make sure your hiring process is stringent and exhaustive to filter out all the bad apples.

Benefits of taking out a loan to hire employees

As discussed before, each employee will generate you 4x on what you pay them. The more employees you have, the faster your enterprise will grow. If you don’t have money to hire the right employees, how can you possibly fight it out against the competition?

The answer is SME and MSME business loans. This is a game-changer for micro, small, and medium businesses like yours. Your competition will use business loans to compete against you, so your only option is to bring in more money through equity or business loans.

The Government of India is incentivizing businesses to utilize MUDRA loan facilities, unsecured working capital loans, women entrepreneurs loans, and more. The GoI wants Indian businesses to take out loans and grow and compete in the international markets against MNCs.

Drawbacks of taking out a loan to hire employees

A loan is a double-edged sword. If you take a loan and cannot repay it, it piles up quickly. Failure to repay will negatively impact your credit score and your business.

If you hire a bad employee, who cannot cover his costs, you will not be able to pay the MSME loan interest rate. A bad hire is an employee who does not have the skills you wanted in them while hiring them, or an employee who is not fit for the company’s culture.

So, you have to be very careful when hiring employees. Only hire the best candidates. Have a very rigorous process to filter out applicants who are not perfect. Bad hires cost large businesses up to 30% of their annual sales! But as long as you can hire the right people and grow your business quickly, you will not be in a position where you regret taking out a loan.

The correct way to finance your hiring costs

Ideally, you should always take a loan to pay employees for one primary reason; to improve your credit score!

Let’s look at a straightforward example:

• You have Rs 10,000 in your bank account.
• It would help if you bought a phone that costs Rs 9000.
• A typical entrepreneur would go to the vendor and purchase the phone for Rs 9000 and have Rs 1000 left in their bank account.
• However, a savvy businessperson would instead take out unsecured business loans or a line of credit loan worth Rs 9000.
• They would use that loan to purchase the phone.
• Later, they would repay the loan using the bank balance for less than 1% interest.
• After repaying the loan, the businessperson would be left with Rs 900 in their bank account, due to interest.
• But, the said person would have improved their credit score.
• They can use this improved credit score to take out cheaper loans in the future.
• This business person will eventually save a lot of money in business loans, vendor financing, loan against purchase orders, mortgages, and more.

All companies who have a finance department know about this. That is why every company uses a line of credit loan to cover their expenses. They use these LoC to pay creditors, employees, rent, and for everything else. It also keeps accountability of how much money was spent and where.

Types of loans and how much they will cost you

You can take out a subsidized unsecured MSME Loan for new business. The Government of India will guarantee that loan. If you default, the GOI itself will pay your dues. It is unsecured for you, as you are not paying any collateral. It is secured for the bank, as they are getting a guarantee from the government. Furthermore, it is also the reason why the MSME loan interest rate is lower than that of other loans. You can take a loan against POS when paying for sundry expenses.

Business Loan interests rate in India start from as low as 1% per month. The more risky your business is, the higher the interest rate. An interest rate between 1–2% per month is standard in India for small businesses.

To calculate how much you will end up paying in EMIs and Interest, you can check out a Business Loan EMI Calculator online. Just input the amount, interest rate, and duration, and we’ll do the rest. You can apply for an online business loan from your home or office. All you need is an MSME registration certificate.

Conclusion

A businessperson shouldn’t be afraid of debt. Debt is being used by your competition to grow, and if you don’t do it too, your business could vanish in a few years. It would help if you stole the top talent from your competition by paying them better. Not only would this hamper their progress, but it will boost your business exponentially.

Hiring a good employee is going to be expensive. You may not be able to afford doing so by yourself. But that is where business loans come in. Your goal is to hire an employee and use that employee to repay the loan while making a profit. Make sure to hire the best and the brightest employees only. This would help keep the chances of a bad hire to a minimum.

No large company uses its bank accounts to make payments. They use some form of working capital loans, like a line of credit loan, to cover their expenses and maintain liquidity in the business. This builds up a good credit score and helps maintain a good relationship with the banks.

Startups, small businesses, and women entrepreneurs are receiving incentives to take out loans. The idea is that they grow and compete against large companies. You can apply for the Mudra loan, working capital loan, vendor financing, or SME/ MSME business loans, among others. The world of loans is a vast one. Do your research well before executing your loan-related plants to get the best deal!