Why Using a Loan to Hire Employees is Risky

Why Using a Loan to Hire Employees is Risky

Caution is needed if you're considering lending to recruit new staff.

By Marcia Smith

Hiring employees is a crucial part of growing any business. Businesses either take a proactive or a reactive approach to hiring. Proactive hiring involves bringing in staff to cope with anticipated demand, to ensure the company has enough resource to cope as the business grows. Reactive hiring involves ‘hiring when it hurts’, bringing in staff when demand is beginning to take its toll on the existing workforce or even having a detrimental effect on the end product.

Lending is a risk

Whichever approach you take, hiring an employee should only be funded by a bank loan if you have significant cash flow issues and are confident that these will be resolved once the candidate is in their role.

Borrowing from a bank to fund a new employee on the assumption that this hire will stimulate enough growth to be self-sustaining is a risky strategy. Of course, it may pay off, but understand that you could be left with the cost of paying off the loan as well as paying a salary, without seeing a consequent uptick in revenues.

Put up your prices

If you're having problems keeping up with demand but can't afford new employees yet, you could always put up your prices.

It’s great that demand is so high but it isn’t great (for both you and your customers) that you can’t keep up. Really think about your current situation. By raising your prices you may lose some customers, but it could make your business model more sustainable and scalable, as you can meet demand without exhausting yourself and make a similar amount of money. It would also mean you’ve more time to focus on satisfying your customers to ensure they return.

If this option isn’t viable, consider hiring someone on a part-time basis. This will cost you a lot less and take some of the workload off your shoulders. Similarly, you could hire an apprentice or intern.

You should also consider your whole business plan. You’re so busy that you can’t keep up with demand, yet you don't have enough money to hire a new employee; ask yourself where you’re going wrong and make some changes. It may seem like a good problem to have – being too busy – but really, the last thing you want as an SME owner is to be turning business away.