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Should I take out a bank loan in order to afford to hire employees?

By Ryan Himmel

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

I own a cleaning business which I am currently operating on my own. Can I claim interest and application fees as a tax deduction?

Looking to expand your business and hire more employees is always a very exciting yet critical point in a business.

I would caution you to really ask yourself again if you currently have the business and pipeline of business that would warrant you to comfortably take on debt--and seriously ask yourself if you have a plan to pay off that debt in the near future.

I cannot tell you how many times we have clients that get ahead of themselves with leveraging up their balance sheet and hiring staff without having the business or future business to support such a model. It can create a very deep hole that can become very tough to climb out of.

However, if you can very comfortably say that you need additional employees to help grow the business, then I think it may make sense to obtain credit--particularly for your situation.

As for funding the initial payroll with an overdraft or bank loan, you will likely want to get a bank loan. Overdraft rates are usually higher than bank loan rates.

In working with your bank, be as forthcoming as possible regarding your history and your needs. Your banker, in turn, will tell you exactly the information he or she needs to present your "best case" to the bank's credit committee.

Be sure to provide no more and no less than what is specifically requested. The banker may advise that, in order to obtain a loan you need to increase operating cash flow in the business.

As for your question about deduction loan interest, the answer is yes. Generally speaking, you can deduct the loan interest and fees if you paid the interest and fees during the tax year (refer to IRS Publication 535).

Best of luck with the expansion and new hires!

Ryan Himmel

Head of Financial Partnerships, Xero Americas

Ryan Himmel is a CPA and financial technology executive who has dedicated over a decade of his work toward providing solutions to help accountants and small-business owners better run their firms. Himmel currently leads financial partnerships in the Americas for Xero.

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