Sharing your thoughts to people about your plans of starting a business could create mixtures of different opinions. In terms of getting a business loan, you can get a bunch of stories on various reasons why you should or shouldn’t borrow money with interest to either start or expand your business.
Of course, you should avoid bad debt at all costs. However, debt can work in your favor, if used to make a higher return. So, if you plan to scale up your business, here are the six reasons to reconsider applying for a small business loan.
If your stock rooms are full-packed with inventory or your assistant is forced to move to the kitchen to have an office space, you need another location. Perhaps you run a restaurant or retail store, and your customers are overly-crowded to go in-and-out, then you might need another branch to efficiently serve them.
Expansion of physical space is an excellent problem to have. It’s a sign you’re running a booming business. However, depending on the situation, you could still not have enough cash on hand to get another location. In this case, applying for a term loan could help you make that bold move.
Also, you should consider many factors. You can use your latest balance sheet to ensure you’ll still end up with a profit if you plan to branch out to another location and conduct market research on the area to know if you could find your target customers.
If you have a vision of large financing for your business, then you should consider building a strong foundation as early as possible. One of the strategies you can take is building better credit and making yourself more credible in the future.
While your business is young, you can start with a smaller short-term loan. As you might not qualify yet to borrow a larger amount of cash, you should show the banks you pay for small amounts on time.
Besides improving your business credit, you can also create professional relationships with lenders, which can later help you get higher financing. As a caution, always make sure you can commit, a single late payment could harm your chances of getting qualified for future funding. If you could not pay on time, it’s much better if you don’t take a loan at all.
The need for additional business equipment can improve your business. Either you need machinery, IT equipment, or other tools to make better products or improve customer service, applying for a loan could help you achieve those goals. Similar to a car loan, you can also make your equipment as collateral.
However, you should communicate well with your employees to ensure you get an essential piece of equipment. If you purchase equipment because it’s nice to acquire, but don’t add value to your business, then you just made a needless expense.
Adding more inventory is another way to keep up with growing customers’ demand. Same with getting additional equipment, you need to buy more inventory to improve your services. Depending on the cash flow of your business, deciding to get a loan to buy more inventory while not seeing yet the return on the investment is difficult to take.
If your business is most profitable in certain months, you might need to get a loan to buy plenty of inventory as you lack the cash on hand. As you rely on the most profitable seasons, such as the holiday or tourists visit during summer, the loan will keep your business afloat in the least profitable part of the year.
Of course, you can compute if taking a loan was really necessary. Gather all your sales data to create projections based on past years’ performance for the same months. Keep in mind though; you should make conservative computations as each year could vary accordingly.
From time-to-time, an opportunity comes along, which you think too good to let go. Either you find a chance to order a discounted bulk of inventory, or a low-price retail space for expansion, you can opt to a loan to not let that chance pass up.
For example, if you need to sign a contract with a customer that can pay you S$20,000, but you need equipment to deliver, then you should compute if it’s worth it to get a loan for a piece of equipment. If the equipment cost S $ 5,000 and you took a two-year loan at an interest of S $ 1,000, you make a $ 14,000 profit.
So, take the loan if the profit from the opportunity outweighs the potential debt. However, don’t let over-enthusiasm make you the mistakes of overestimating the probable profit while underestimating the risk of haphazardly borrowing money.
Running a startup or small business means you do most of the work on your own. Later on, you can go weary juggling different tasks, not to mention you still have a personal life to live. Perhaps, you already have a small team, but still, the current manpower couldn’t handle the workloads.
So, hiring fresh talent can be the best solution. Besides physical space and equipment, some businesses also invest in honing fresh talents to make their company competitive and innovative. As long as you focus on the big picture, you get assurance that the loan is worth taking.
No matter your reasons for taking a business loan, these six on the list could help you make a better decision. After factoring out all the costs, including the loan, as long as you end up with a better profit, you keep improving the bottom line.
All businesses grew from taking risks, and taking a loan is one of those. As you matured in running your company, you can take loans as effectively as possible for you to move to the next level.