Why Take Out a Business Loan?
Taking out a business loan can help you build and grow your business at times that you need extra capital or cash flow. With this in mind, it is important to understand how taking out a business loan can affect your business to understand if taking out the loan will positively or negatively impact your business.
Things to consider before taking out a business loan:
- Take out a business loan if it will improve your bottom line.
- Take a second look if you're unsure taking out a business loan will improve your bottom line. The more confident you are that the rewards outweigh the risks, the more likely it is you should take out a business loan.
- Understand that every decision requires risk. Decide if the risk of taking out a business loan is worth the reward. Ask yourself what would happen to your business if you defaulted on the loan. If, for whatever reason, you can't repay the loan, have a contingency plan in place.
Reasons to Take Out a Business Loan
There are many reasons business owners take out business loans. It's important to understand these reasons to decide if your reason for taking out a business loan is a good enough reason or not.
Here are the most common reasons for taking out a business loan:
Expanding a Physical Location
Perhaps your business is growing at an alarming rate, and the space in which your business occupies no longer serves its purpose. Maybe you need to relocate to a larger facility to make your business more profitable?
Questions to consider before taking out a business loan to expand your physical location:
- Will business revenue change? If so, in what direction? It's important to make sure that when you're changing your business’s physical location, you account for revenue changes. If the move improves your profits — great; make the move. If the move erodes your cash flow, stymying business growth, rethink the move.
- Can you still make a profit and cover the loan? If the answer to this question is yes, then it may make sense to take out a business loan to expand your physical location.
- What will be the overall impact on your business? It's a good idea to write about the pros and cons of moving locations before considering a business loan.
Do your due diligence before you take out a business loan to make a move. You may find that moving locations greatly help your business grow and prosper. On the other hand, you may find that moving locations hurts your business.
Build Business Credit for the Future
If your business is relatively new and you plan to take out a larger loan to spur growth within a couple of years, it probably makes sense to take out a small business loan now to help your business credit.
Taking out a small business loan now can greatly improve your business credit score, so long as you pay the loan off in full and make your payments in a timely fashion. Never be late repaying a loan. This can be worse than had you never taken the loan out in the first place.
Here are some things to consider when building business credit for the future:
- Don't buy more loans than you can afford. Remember a short term loan usually comes with higher interest rates and a higher APR, make sure that you understand what the APR is and know how this will impact your business in the short term.
- Build relationships with lenders. Find strong lending partners that can assist you in the future with getting a larger loan. It could be the case that the lender you're doing business with now, will extend to you a larger line of credit in the future. In any case, make sure you have a strong relationship with the lender to help your future prospects of getting a loan.
Buying Equipment With a Business Loan
An equipment loan is usually a wise investment. Equipment loans come with pretty good terms because, often, the equipment itself is held as collateral. If you don’t pay the loan and the bank will take ownership of your equipment. This means less risk for the lender.
Reasons why you might consider and equipment loan:
- Technology changes rapidly. Because technology is constantly changing and improving, upgrading your technology might be just the thing your business needs to get ahead of the competition and take a larger share of the market.
- Equipment is usually a need not a want. It's important to take out a business loan to support your business needs, not your individual wants. Investing in the right technologies to improve your business can save costs in the long run by helping companies to function more in-house; rather than having to rely on outside trading partners. If you can produce a product in-house, chances are your costs will be significantly less than having to rely on outside service providers or vendors.
Take Out a Business Loan to Acquire More Inventory
Without an inventory, you cannot sell your product. Sometimes it's necessary to take out a loan in order to acquire more inventory, especially when your accounts receivables have not yet been paid in. Having the purchasing power to acquire more inventory as needed will ensure your business can continue to function and serve the public.
Here are some things to think over when deciding to take out an inventory loan:
- Consider waste. If you acquire too much inventory and that inventory expires, then it's the same as throwing away money. For this reason, take into consideration the shelf life of a product -and, don't order more product than you need. Taking on a smaller loan to acquire just enough inventory is better than taking on a larger loan with a higher interest rate that won't serve your businesses purposes.
- Create sales projections based on last year's numbers. Go back and review last year’s sales and make comparisons with where you're at now and where you are likely to be by the end of the year. Taking an average of a few years sales is a good starting point for how much loan you should buy.
- Be conservative. It's better to take out a little less loan than what you think you'll need. With inventory, things are a little different. Sometimes there are other ways of acquiring inventory without the help of a business loan. For this reason, have some other options in mind and take out just enough money to cover what costs you think you'll need to cover.
Hire New Talent
If you are a new business owner, chances are you're wearing many hats; you are doing everything from bookkeeping to managing to operating your business day in and day out. Over time, as your business grows, it may be necessary to leverage the help of others, and this means hiring staff. Hiring staff can be a smart investment, but sometimes it can be a fatal liability. It's important to understand your business needs—What's most important in your business at this time? Hire the staff needed to fill those positions.
Some positions cost more than other positions. As a business owner, you will need to weigh the pros and cons and decide which positions your business must hire for.
Here are some things to consider when hiring new talent for your business.
- Find the best talent at the best rate. You don't have to accept that you must pay the same wage to an employee that's based around the national average. As a small business, you might not be able to afford it. Sometimes you have to get a little creative when hiring staff, like finding out what's important to them and seeing if there are other ways of rewarding or compensating them besides just a large salary.
- Hire the right people for the job. Make sure when hiring people, you consider their background and capabilities as well as their education. Look at their experience, ask sound questions, and never hire anyone unless you're absolutely certain that hiring the person will improve your bottom line.
- Don’t over-hire. One problem many small business owners run into is over hiring staff. Just because you want to make your life easier doesn't mean that you should take yourself out of the business equation just yet by hiring people to do your job for you. Look at your bottom line and determine how much money you can spend annually and what results will be achieved from hiring those individuals. It doesn't make sense to hire someone if your bottom line won't improve.
Action Steps to Take Before Deciding to Apply for a Business Loan
Do your due diligence before applying for any business loan. This is a critical step because a business loan can either positively affect your business or negatively affect it. The more certain you are that a business loan will positively impact your business, the likelier the chances a business loan is the right decision for your business.
Here are some action steps to take before applying for a business loan:
- Know your reason. Decide why you need a business loan. Do you need a business loan to expand to a new location? Do you need a business loan to help you build business credit to get a bigger loan in the future? Do you need a business loan to purchase new equipment for your business? Do you need a business loan to purchase more inventory? Do you need a business loan to hire fresh new talent? Whatever your reason for needing a business loan, make sure it's justified.
- Research the pros and cons. After you have decided on the reason for needing a business loan, make a list of pros and cons associated with taking out the business loan. For example, if you're taking out a business loan to hire fresh new talent, decide how much more profitable your business will be with another pair of hands-on-deck. If there is no profit margin, then you can dismiss the idea of hiring new talent. On the other hand, if you determine hiring help will bring in substantial profits, hire away.
- Weigh the risks. A business loan can be risky. Make sure you understand the risks associated with whatever loan you're applying for. Make sure you have a plan B in place in case you cannot make a payment on time. It's far better not to take out a business loan if you're unsure whether you can repay that loan on time every payment. If you ever miss a payment it can substantially hurt your business credit profile and business credit score. If you're unsure if you can pay the loan back or pay it back on time, do not take out the loan.
- Weigh the rewards. Some rewards are better than others. It's important to evaluate the potential rewards that can arise from taking out a business loan. Make sure it's worth your time and energy taking out the loan. If there is not much reward in it, then we suggest rethinking the loan.
Taking out a business loan comes down to critical thinking and practical business sense. The main question to ask is whether this loan will improve your business’s bottom line. If you're unsure, take a second look. It's important to be confident when taking out a business loan and make sure it’s the right decision for your business.
If you're having second thoughts, then chances are you need to reevaluate the idea of taking out a business loan. However, if you're confident, then taking out a business loan may be the best leverage point for your business. Every business decision involves risk. Choose wisely.