In a world ridden with debt, you could be forgiven for wanting to avoid opening up new lines of credit for your business and going it alone.
However, if the truth is told, seeking out external funding can be a great way to help you meet your goals and take your business to the next level. After all, cash is a vital tool for every business, regardless of what industry or sector you operate in.
Sometimes an injection of capital could be all you need to finally scale your operations and finally hit your objectives.
With that said, taking out a business loan is not something that should be taken lightly. If you fail to make payments and default on your credit agreement, you could be faced with heavy fines, sanctions, and it could mean that you have to shut down operations entirely to pay back your debt.
On top of this, many creditors ask small and medium-sized business owners to take on some level of personal liability, which could lead to a loss of personal assets if the business cannot pay the loan.
In general, it’s better to avoid creditors that offer this sort of agreement, so make sure you shop around and compare small business loans before signing on the dotted line.
Considering all of this, you must ensure that you are borrowing money for the appropriate reasons.
Furthermore, you must verify that you will be able to repay the loan even if things do not go according to plan; that way, you can minimize your risk and ensure that you keep hold of your business and personal assets.
On that note, here are a few scenarios in which obtaining a business loan could be the best step forward:
When there’s a golden opportunity that you can’t pass up
Now and again, an opportunity presents itself that is simply too good to pass up. Maybe a customer has come to you with a huge order, and you need to find more cash to purchase the raw materials.
Or, maybe you have a rare opportunity to purchase inventory in bulk at a huge discount. In these cases, calculating the potential return on investment compared with the loan cost is a smart idea.
What is the revenue/profit you stand to gain if everything goes as planned, and what is the interest on the loan?
If you believe that the prospective return on investment surpasses the cost of the loan after performing your calculations, then go for it! However, be cautious in your calculations.
There are plenty of stories out there of over-optimistic entrepreneurs who have been burned in these sorts of situations, so try to err on the side of caution, and remember – if something sounds too good to be true, it probably is!
When it’s time for an expansion
Perhaps one of the most common (and justifiable) reasons for taking out a business loan is for an expansion. Whether it’s expanding your physical offices or moving into a new market entirely, expanding your business is a resource-intensive exercise.
As a result, you will need to find more capital and a lot of it.
If you’re thinking about going down the business loan route, calculate the potential sales boost that will arise from your expansion plans. Will the sales pay the loan’s cost while still generating a profit?
You can determine if your goals will positively influence your bottom line by combining your sales estimates with your existing balance sheet.
When you need fresh talent
Forget your technology, machinery, clients, and customers; employees are the most important assets to your company.
The quality of your workforce has a profound impact on the success of your business, and as a result, you need to prioritize finding the best talent for each role so you can keep moving forward and achieve your goals.
With this in mind, taking out a business loan to help unearth and fresh onboard talent for your company could be one of the smartest moves you will ever make
When you invest in new tech
The digital revolution is upon us. As a result, organizations worldwide are rapidly embarking on digital transformation journeys to help improve efficiency and boost productivity.
As they say, sometimes you have to spend money to make money, and in this case, securing a business loan to invest in new digital tech could be a great long-term play that will help you obtain a competitive advantage over your rivals.
When you need to start building credit
Building a credit score can be tough. You need credit to take out a loan, but you need a loan to get credit. This paradox has left many business owners scratching their heads.
However, If you plan to apply for larger-scale funding for your company in the next few years, there are a few things you can do to enhance your chances of getting finance.
The easiest approach is to obtain a small business loan and then make all of your payments on time until the credit arrangement is fulfilled.
Many business owners see this as one of the many mandatory obligations they have to go through when starting a new business. Since the banks have no history of your creditworthiness, you need to prove that you are a responsible borrower.
If this sounds like something you are interested in, shop around for the best rate and remember to keep your borrowing to a minimum, especially if you don’t require the funds.
Regardless of why you’re considering a business loan, the bottom line is this: If taking out the loan is likely to boost your bottom line after all costs are taken into account, then you have the green light.
However, if the purpose for the loan is unclear, and you cannot give a concise and direct answer on how the financing of a loan will help you move a step towards your goals and improve your business operations, then maybe it’s best to reconsider and steer clear of getting into debt this time around.