Whether you’re hiring your first employee or your tenth, creating jobs as a business owner can potentially help you take your business to the next level. If your cash flow isn’t ready for the cost of a new hire, however, you might be considering taking out a loan to help you create the new job.
Borrowing money to invest in human capital can be a good thing, but it’s important that you carefully consider all aspects of the decision to before you pull the trigger on a loan application. To help you, here are five questions you can ask yourself.
1. What’s the reason?
You probably have a good reason for wanting to hire a new employee, but if you haven’t spent a lot of time laying it out for yourself, now is a good time to do so.
Specifically, think about what you want to hire a new employee to do. Is it to help with sales or provide support to free up more time for you to be involved in sales? Is it to perform a job, such as marketing, legal or accounting, that you’ve been outsourcing and want more control?
Whatever it is, take time to think through why you want to add someone new to the business and whether they’d have enough work to constitute a full-time or even part-time job.
2. What’s the cost?
To understand how much you’ll need to borrow, you’ll need to know how much your new employee is going to cost your business. For starters, do some market research for the specific role to find out what a reasonable salary is. Also, consider other aspects of a total compensation package, such as health insurance, 401(k) contribution matches, wellness plans and more.
Also, it’s important to understand that the compensation package isn’t the only cost of hiring a new employee. You’ll also be on the hook for job board fees, background check and onboarding expenses, your share of FICA taxes for the new person, and more.
Before you move forward with a loan, it’s essential to understand how much you actually need and for how long. If you borrow too little, you could run into problems down the road that could threaten your business.
3. What’s the return on investment?
Taking out a small business loan typically only makes sense if you can leverage the money to get a return on investment that’s higher than the loan’s interest rate. Depending on what the new hire will be doing, though, it can be tough to come up with an exact number.
For example, it may be possible to run projections for how much a new salesperson can bring in over the course of a year based on previous experience. And if you’re bringing human resources in house and saving money in the process, you could include those savings in your calculation.
But if a new employee doesn’t have a direct influence on the company’s bottom line, you may need to consider it qualitatively. For example, hiring an executive assistant can help reduce the overall workload of everyone else in the company, improving both productivity and morale.
Every business is different, so you’ll know best which approach to take. Whichever one you choose, though, take the time to consider exactly how borrowing money can make your business better.
4. What’s your hiring strategy?
According to a survey by CareerBuilder, companies lost an average of $14,900 on every bad hire, and 74% of employers admit they’ve hired the wrong person for a job. So if you’re thinking about borrowing money to bring someone on, having the right hiring strategy is critical to the success of your business.
If you already have solid employees, you may already have a hiring plan in place. But if this is just your first or second hire, it’s important to create one to help you find the right people.
One important component of a good hiring plan is to avoid getting desperate. If you’re more concerned about getting someone to fill a vacancy than you are about who that person is, you may overlook some red flags and hire the wrong person.
Also, have a vigorous interview process to help you make sure the candidate is a great fit for both the job and the company culture. And to avoid spending too much time on hiring, start with a quick phone interview with each candidate. In just a few minutes, you may be able to get a decent idea of whether they might be a good fit.
If you don’t already have a hiring strategy in place, make sure you have one before you apply for a loan.
5. What can you qualify for?
There are plenty of affordable small business loans available, but you may or may not be able to qualify for them. If your company has been in business for a while and has a solid financial track record and business credit history, you may have a good chance of getting approved for a low-interest bank loan or SBA loan.
In this situation, it would be relatively easy to justify borrowing money to hire a new employee for your company.
If, however, your business is relatively new and has no business credit history or record of strong revenues, you may have a tough time getting a decent loan. If you’re paying upwards of 20% interest, it may be difficult to get the return on investment you’re hoping for.
The bottom line
Borrowing money to create a new job may be an excellent way to scale your business. But if you don’t take the time to consider every aspect of your plan, it could end up hurting your business more than helping it.
As you consider these and other important questions you come up with along the way, you’ll be in a better position to determine whether getting a small business loan to hire a new employee is the right decision for you.