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When Should I Consider Getting A Business Loan?

10 February 2022 | 1 comments | Posted by Andrew Anderson in Money Talks

considerations for a business loan

When you announce that you are considering a loan for your business, you might encounter all kinds of opinions. It doesn't matter who you meet; everyone will have a story about what might happen if you take out a loan to start or expand your business. Here are six reasons why you might re-consider applying for a small business loan if your business is ready to grow but lacks the necessary working capital.

Is your physical location ready to expand?

Are you feeling like your space is getting a bit too crowded for your liking? It sounds like you have outgrown your original office space. Maybe you own a restaurant or a retail store, and you have more customers than you can accommodate.

This is terrific news! You are ready to expand when business is booming. You may have the capacity to grow your business, but that doesn't mean you have the cash on hand.

There are high up-front costs and changes to overhead whether you're adding a new location or picking up and moving. This is where a loan will come in handy.

Building credit for your future

It makes sense to start with a smaller short-term loan to build your business credit if you plan to apply for more extensive, longer-term financing in the future.

As a result of this tactic, you may be able to build relationships with a specific lender, giving you a connection you can use for a larger loan when the time comes. Make sure you don't take out an early loan you can't afford, though. You may not qualify for future funding even if you make one late payment on your smaller loan.

Time to upgrade your equipment

Financing equipment that improves your business is often a no-brainer. To make your product or provide your service, you need specific machinery, IT equipment, or other tools, and you need a loan to finance that equipment. Furthermore, equipment financing often allows you to use the equipment itself as collateral for a loan -- just like a car loan.

When it comes to your bottom line, make sure you separate the needs from the nice-to-haves before taking out an equipment loan.

Need more inventory

Business owners spend a lot of money on inventory. Just as with equipment purchases, you must replenish your stock with plentiful and high-quality options to keep up with demand. Purchasing a large quantity of stock before seeing a return on investment can sometimes prove challenging. Buying a large inventory before seeing a return on investment can prove challenging at times.

Create a sales projection based on past sales around that time to determine whether it would be a wise financial move for your company. To determine if taking an inventory loan is a sound financial decision, calculate the cost of the loan against your total projected sales. Consider multiple years of sales figures when estimating sales, as sales figures vary significantly from year to year.

A business opportunity outweighs the risk of debt

Once in a while, you are presented with an opportunity that is just too good to miss, or so it seems. Your business might be able to order inventory in bulk at a discount, or you may have found a bargain on a larger retail space. As a result, calculating the return on investment of the opportunity requires weighing the cost of the loan against the income that can be generated through the available option.

You should invest if the investment returns outweigh the debt. Calculate carefully. Many entrepreneurs have underestimated actual costs or overestimated profits because of over-enthusiasm. To make sure you're basing your decisions on hard facts rather than gut instinct, it often helps to perform a revenue forecast before weighing the pros and cons.

You need fresh talent for your business

An entrepreneur or small business owner wears many hats. Eventually, however, doing the bookkeeping, fundraising, marketing, and customer service can wear you out. Eventually, something will fall through the cracks if your team does too many things. A loan can help you employ more people full-time so that you can focus on what you do best!

Final thoughts

Regardless of why you're considering a business loan, the main point is this: If, after all, costs are taken into account, taking out the loan will boost your bottom line, then you should do so. Consider whether taking out a loan is the right option if the link between financing and increased revenue is unclear.

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Recommended reading

If you enjoyed this post and have a little extra time to dive deeper down the rabbit hole, why not check out the following posts on small business.

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