The Franchise Forum

Expert financial advice, content, and strategies for your franchise business

The risks of taking out a business loan for your franchise

Business loans can be an excellent tool for funding your franchise and helping it to grow past its initial startup phase. However, even if you have a detailed plan for your business and believe yourself to be reliable and organized enough to avoid any potential problems with such a loan, it’s still important to be aware of the risks these loans come with.

So with that being said, here are some of the biggest risks of taking out a business loan that you must be prepared to mitigate:

Personal liability

If your business ends up folding before you are able to pay of all your debt, you could very well be personally liable for paying off the rest of that debt out of your own pocket. This could take many years and even send you into bankruptcy. Therefore, it’s important to make sure you have a track record of financial growth in your business before you think about taking out a loan.

Credit score

If you rely too much on taking out loans to finance your company, this could have a negative effect on your company or personal credit score. This is especially true if you take out loans from too many different sources.

Interest rate

Whenever you take out new loans, you always have to consider the risk of fluctuating interest rates. If, for example, you take out a fixed rate loan at the wrong time and interest rates go down over time, you will be paying far more interest on your loan than was really necessary. Therefore, make sure you are paying attention to interest trends and seek the advice of financial analysts to determine when is the right time to take out a business loan.


If you opt to go to venture capital firms for funding, you will likely be required to give up a percentage of ownership stake in your business. This means you will lose at least some element of control over your own company. To regain total control you eventually need to buy back your shares at a higher price than the initial investment.

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