When to Take Out a Business Loan to Hire Staff

Borrow to hire only when the new role will bring in more money than it costs, and when your cash flow can carry the wage before that happens. For Croydon business owners, the decision comes down to timing, structure and how long the new hire takes to pay for themselves.

When Does a Business Loan Make Sense for Hiring Staff?

A business loan makes sense for hiring when you have steady demand you cannot meet with your current team, and a clear plan for how the new role will lift revenue. If the hire is a hopeful bet on future work, a loan adds risk instead of reducing it.

A useful test is to ask what the role will do in the first six months. A tradesperson who lets you take on jobs you are turning away has a direct link to income. A receptionist who frees up your time to chase new customers has a slower link. Both can be worthwhile, but the second needs more working capital to cover the gap.

The main trade-off is that wages are an ongoing cost, while a loan is a fixed obligation. If sales dip, you still need to make repayments and pay your staff.

What Costs Should You Count Beyond the Wage?

The true cost of a hire is more than the salary, so your loan amount should cover superannuation, leave, insurance, training and any equipment the person needs. Leaving these out is an easy way for a hiring budget to run short.

It also helps to include a ramp-up period. A new employee is rarely fully productive in week one, so many owners plan for a few months of wages before the role is earning its keep. Your accountant can help you work out the full on-cost for the role you have in mind.

If the hire also needs a vehicle, tools or machinery, it may suit a separate arrangement such as equipment finance, which keeps the wage funding and the asset funding apart.

Which Loan Type Suits Funding New Staff?

The right loan depends on whether you need a lump sum or flexible access to funds. A term loan suits a planned hire with a known cost, while a line of credit or overdraft suits a business with uneven cash flow.

• A business term loan gives you a fixed amount repaid over a set period. The trade-off is that you pay interest on the full amount from day one, even if you do not use it all.
• A business line of credit lets you draw funds as needed and pay interest only on what you use. The trade-off is that limits can be reviewed, and the temptation to keep drawing can build debt.

A secured loan, backed by an asset such as property, can mean a lower interest rate or a higher limit, depending on the lender. The trade-off is that the asset is at risk if you cannot repay. An unsecured loan does not need that backing, but it may come with a higher rate and a lower limit. You can read more about the options on our business loans page, or explore commercial loans if you are using property as security.

How Much Will the Repayments Cost? A Worked Example

Repayments on a business loan depend on the amount, the rate and the term, so it pays to test the numbers before you advertise the role. The figures below are illustrative only, using an example rate of 6.75% p.a.

Consider a Croydon cafe owner who is turning away catering orders on weekends. They plan to hire one extra team member and estimate they need $60,000 to cover wages and on-costs for the first year, plus some training. They choose a five-year unsecured term loan of $60,000 at the example rate of 6.75% p.a.

On those terms, the monthly repayment is about $1,181. Over the year, that is around $14,170 in repayments, which is the amount the new role needs to help earn on top of its own wage cost. The owner expects the extra weekend catering to bring in more than that, and their cashflow forecast supports it.

The outcome is that the owner can see a clear target before signing. If the catering orders arrive more slowly than expected, they know how many extra jobs per month they need to stay on top of repayments. Real rates vary by lender, loan type and your business profile, so treat this as a guide only.

What Lenders Look at Before Approving the Loan

Lenders mainly want to see that your business can repay the loan from its own earnings. They will usually look at your trading history, your financial statements, your cash flow and the credit history of the business and its owners.

A clear business plan that explains why you are hiring and what it should add to revenue helps your application. So does a cashflow forecast that shows repayments alongside the new wage. Some lenders also measure your debt service coverage, which compares your income to your debt repayments.

Because lenders each assess these points differently, using a broker to compare options from banks and lenders across Australia can save you from applying with the wrong one. Each application can leave a credit enquiry, so choosing carefully before you apply matters. If you also hold personal debts, your borrowing capacity may be considered as part of the picture.

Is a Loan Better Than Using Your Own Cash Flow?

Using your own cash is cheaper in interest terms, but it can leave you short if invoices are paid late or a quiet month hits. A loan keeps a buffer in the bank, at the cost of interest and fees.

A sensible middle path for many owners is to fund part of the cost from cash flow and borrow the rest. This reduces the loan amount and the repayments. It also means you keep enough working capital to cover unexpected expenses.

If you already have debts, it is also worth checking whether your current loans are costing more than they should. A review of your existing structure may free up cash for a hire without taking on new debt, and our loan health check is a good place to start.

Talk to a Croydon Broker Before You Advertise the Role

OVM Finance Group is a Melbourne-based broking business that services Croydon. You can learn more about our service on the Croydon mortgage broker page.

Call one of our team or book an appointment at a time that works for you, and we will help you test the numbers before you make your next hire.

Frequently Asked Questions