Like raising a child, there’s no set manual that comes with owning your own business. Even the best entrepreneurs struggle with making the right decisions when it comes to their business’s growth strategy. One of the largest questions that looms in their minds is, “When is it in my company’s best interest to apply for a loan?”
While the answer to this question isn’t set in stone, it is important to note that incurring debt isn’t necessarily a bad thing, especially when it’s a risk that will yield great returns for your organization. In fact, 73 percent of U.S. small business owners used financing in 2015-2016 (https://www.sba.gov/sites/default/files/Finance-FAQ-2016_WEB.pdf). So when is applying for a bank loan good for business growth? Use the following reasons as your guide.
Business is booming… so much so you’re considering expanding. Unfortunately, this decision comes with its own set of expenses, including building renovations, staff additions, advertising, new property construction, and the list goes on and on.
A small business loan can provide capital to address these costs, while maintaining consistent and positive cash flow to operate the existing business. An important first step is to generate a revenue forecast. Be sure to compare it against the existing balance sheet to ensure an expansion is in a wise investment and the market demand is there to absorb the additional capacity. (https://www.entrepreneur.com/article/280592).
With startups that have no established credit history, it can be difficult to secure a large bank loan. To remedy the situation, apply for a small business loan first. Small business loans are typically faster to pay off; however they have one drawback – higher interest rates. So make sure the loan terms are affordable. One missed payment could negatively impact both business and personal credit history, making it difficult to secure that larger business loan needed for future expansion purposes or equipment upgrades.
Inventory is a difficult expense to manage, especially if business is seasonal and relies on purchasing large quantities of items without having the capital available to offset this cost. A short-term loan can not only provide the cash flow needed to keep inventory well stocked, but also can also build favorable credit history as it can be paid back quickly with the earnings generated from seasonal sales (https://thebalance.com/four-reasons-to-take-out-a-business-loan-393255).
Whether a new business needs equipment to mass produce a particular product or an existing one seeks to update outdated technology, a loan can help finance the cost of purchasing the equipment needed to get the job done. The last thing wants to experience is an equipment malfunction that hinders the production line, stymies efficiency, or fractures customer relationships. Securing a business loan for the purpose of investing in new equipment can help avoid any unexpected pitfalls, while keeping business and productivity at an all-time high.
When the opportunity outweighs the risk
We’ve all heard the old adage, “if it’s too good to be true, then it probably is.” But sometimes in business we stumble across an opportunity that is worth the risk. These opportunities can present themselves in a variety of ways, such as the chance to place a bulk order of inventory at a significant discount or purchase a larger commercial space for less than the retail price. If the revenue forecast and other objective analysis shows your return on investment will far outweigh the cost of the loan, then the opportunity at hand may just be a risk worth taking. Again, it’s important that there this analysis is done accurately, objectively and includes all relevant risk factors as well as opportunities.
As any business owner knows, there can be dry spells when cash flow is stagnant. This can become problematic quickly, especially when monthly bills – utilities, mortgage statements, employee salaries and inventory costs – continue to accrue. To ensure sufficient cash to get through this short-term crunch, most business owners rely on a Line of Credit to maintain a steady cash flow. The key to obtaining a line of credit is to set one up before it is needed and to manage it carefully, including fully retiring the balance for 30 days in every twelve month period.
Loans can be good for business. But before deciding if it’s the right solution for business growth and success, weigh the pros and cons. If Lucrum Consulting can help evaluate loan options or assist in generating revenue forecasts, please do not hesitate to reach out.