Why Borrow?

We need to borrow money for many reasons.  Mostly, we borrow to:

  • Invest;
  • Respond to an emergency; or
  • Consume (purchase an item for which we do not have enough money at the time of purchase).

A loan provides you with a lump sum of money that might be difficult to obtain otherwise. It enables you to take advantage of business opportunities, respond to emergencies, make home repairs or purchase something you need. But borrowing money can be expensive and carries obligations to repay on time.  For these reasons, taking a loan is not the same as using your own money that you may have through wages, business profits or savings. The chart below outlines the advantages and disadvantages of taking a loan.

Taking a Loan Using Your Own Money
Advantages
  • You gain access to more money than you have in savings.
  • You get money quickly when you need it for emergencies.
  • You avoid the costs of borrowing.
  • You are free to use your money as you wish.
  • You face less risk when you finance your business growth in smaller increments based on what you can afford to invest.
  • You avoid the obligation of future loan repayments.
Disadvantages
  • You bear the cost of borrowing (with interest, fees and time to apply).
  • You are responsible for repaying your loan on time, and face penalties for late payment.
  • You must meet the requirements of group membership (attend meetings on time, etc.) if the loan is through a group.
  • You have limited access to needed capital.
  • Your business grows more slowly.
  • You have limited ability to respond to opportunities.

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