Taking out a loan can be a bit intimidating for small businesses, particularly for newer businesses that haven’t had a loan before. There are a lot of questions you need to ask yourself before you even start looking.
How do you know if your business is ready? Can your business afford a loan? Does your business even need a loan to begin with? While the debt can be scary for small business owners, if it’s manageable, a small business loan can help fund changes in your business that can result in increased profits and a return on your investment.
If you’re unsure whether your business is ready for a loan, take a look at these five reasons to take out a small business loan:
This is probably one of the more obvious reasons to consider a small business loan. Whether you’re taking on more staff and it’s time to move to a bigger office space, or sales profits are booming and you need a second shop front to cater to your growing customer base, it’s important to facilitate business growth so your profits don’t plateau.
Unfortunately, sometimes when your business is ready to expand you don’t always have the cash on hand to do so. In these cases, your business may need a short term loan to help fund the big move – when deciding on the loan amount, make sure you consider any additional setup costs (like advertising, renovations etc.) and the potential change in revenue during your expansion.
Expanding your physical business location isn’t the only way to keep your business growing. If you run a startup then odds are you’re probably doing a lot of different jobs all on your own! After you’ve established your business and are getting more traffic, it could be time to expand your team. Taking out a loan to hire more staff could take some stress off your plate and increase your productivity in the long run!
Inventory is one of the biggest and most difficult-to-manage expenses for many businesses. Once you’re all set up and operating you will continually need to replenish and expand your inventory to meet demand and provide better options to your customers. The problem, as many small business owners will know all too well, is that you have to invest in your product and maintain stock before the customer has even purchased it. This can be particularly difficult for businesses that carry seasonal inventory.
Taking out a loan can help smooth out the seasonal stock turnover periods or be used to purchase additional stock in anticipation of high sales traffic. Taking out a small business loan for inventory purposes can be a wise financial move but always make sure you research the projected sales and compare that with the calculated cost of debt.
This one can be a no-brainer. In some cases, you will be able to directly calculate the increased productivity and subsequent profit from a new or additional machine. Regardless of the industry, your business will need machinery, IT equipment and any other number of tools to perform your service or build your product. Taking out a loan to finance new equipment is a pretty safe option for most small business owners (some equipment pays itself off pretty quickly too!). Plus in some cases, the equipment can serve as collateral for other loans – similar to car loans.
Just make sure your business actually needs the equipment. As good as that margarita mixer may look, taking out a loan for it may not be the best move!
4. Cash Flow
Cash flow can often be a bit problematic for small businesses. This is especially true for businesses where customers or clients make repayments over a longer period, or for seasonal businesses in the quieter months. Cash flow management can also be challenging in transitional periods where old stock needs to be moved out to make way for new inventory. In these cases, taking out a small business loan for a quick injection of cash can help to keep things running smoothly.
Short-term loans for regular operational costs can help businesses stay afloat when profits are low. By ensuring money keeps flowing through the business, you can continue to bring in customers while offsetting any losses.
5. Building Credit
This is one that not too many new small businesses consider. If you’re planning on taking out a bigger loan at some point in the future, then it could be wise to take out a small loan earlier to build up a good credit rating. If your business doesn’t have a long credit history, this is also a good way to bump up your rating.
Before you take out the loan however, make sure you can easily afford the repayments – one late repayment can really hurt your credit score, so calculate the loan carefully. That being said, don’t take out a loan you don’t really need. No business needs to take on unnecessary debt, so use the loan to purchase something that you will get good use out of, like a small piece of equipment!
Making repayments on time or even early is a great way to build trust and start a relationship with a specific lender (just make sure there are no hidden loan fees associated with repaying early!). Odds are, if you’ve paid on time, they’ll remember you if you go back to them for another loan in the future!