When Should You (or Shouldn’t) Take Out a Business Loan

A question we often get asked. Should I take out a small business loan?

The answer is that it varies. After all, every business is unique. What is suitable for you might not be suitable for the guys down the road. A few things that can play a role are your current business standings, industry, cash flow, and most importantly, the loan terms.

We don’t mean the best date/time when we talk about the best time for your business to apply for a loan. We’re talking about points in your company’s lifecycle when you might be thinking about some financing options. Here are several scenarios where getting a loan for your business might make sense.

If you run a seasonal business, you may find it difficult to make ends meet during the slower months. Business financing could offer a bridge of working capital to help you through a temporary difficult patch when you are experiencing cash flow problems, which history has shown to be only temporary.

Another good time to take out a loan for your business is when you want to expand your business by buying a new larger or better location or real estate that’ll impact revenue, or if you’re looking to buy a piece of equipment that can impact revenue and product quality as well.

Another excellent scenario for businesses to apply for financing is when they want to plan for some future spending or expected difficulties. Even if you don’t want a lump sum of cash right now that you will have to start loan payments on right away, such as with a term loan for working capital, consider a line of credit, since you can borrow from the line whenever you need it, whether that’s a little now and a little in a few months.

Ok, this may be a bit surprising, but often, the best time to take out a loan for your business is when your cash flow is strong, you have good credit, and you aren’t in critical need of money. Your ability to satisfy the eligibility requirements of lenders will determine your eligibility for the lowest interest rates and your range of loan possibilities. That might not be the case during bad times.

Every now and then, an opportunity comes knocking that is just too good to pass up – or so it seems, at least. Maybe you have a chance to order inventory in bulk at a discount, or you found a steal on an expanded retail space. In these instances, determining the return on investment of the opportunity requires weighing the cost of the loan versus the revenue you stand to generate through the available opportunity.

Now that we’ve talked about several situations in which it might make sense to seek a loan for a small business, let’s look at some situations in which you should think twice before making the call.

It’s critical to carry out market research and an ROI analysis before pulling the trigger on a small business loan. You most likely already have all the advantages in mind, but you also need to be aware of any potential drawbacks.

Knowing when and how much an investment will start to turn a profit is also essential.

Are you attempting to secure short-term money to assist with what is actually a long-term challenge? For instance, you’re facing financial difficulties in your business, but your sales team is killing it, and you don’t have an urgent cash flow problem. You might believe funding could be the answer. In this situation, you are most likely better off focusing on getting your budget under control instead (or consider applying for a loan to invest in an accountant instead).

Have you taken out several loans or used up all the available credit on a current line of credit? Taking on any extra debt at this point will be a higher interest rate and become more expensive.

Try a different strategy if you have a history of piling up debt and misusing your money.

Also, beware of taking out more than you can handle. You may be approved for a higher loan amount than you needed, and it might be tempting to take extra, but realize that will come with a higher monthly payment, and you’ll pay more in interest on a larger loan.

Although it should be obvious, never use a business loan to cover personal expenses. Mixing personal and business finances, much less personal and business debt, is a bad idea. Even in their contracts, some business lenders expressly declare that money cannot be used for anything other than company-related expenses.

So now, When you’re asking yourself, “Should I take out a small business loan?”. Think about the many variables at play as well as the advantages and disadvantages of the loan. Additionally, consider your company’s profile from the perspective of a lender and how challenging it could be to obtain a loan. Remember that your ability to qualify for a loan depends on its type, size, interest rate, and terms, as well as your business’s duration, revenue, cash flow, and credit score.