Let’s say that you’ve decided to open your very own business. When news gets out that you’re contemplating a loan for your company, you can get a wide range of responses. Everyone you encounter will have an opinion on what could go wrong if you borrow money to launch or grow your firm, from outright detractors to cautionary tales.
While it’s true that not all business debt is created equal, it doesn’t mean there aren’t legitimate reasons to take on debt. Here are eight instances in which you should reconsider requesting a small business loan when your company is poised to expand but lacks the necessary working capital to do so.
Starting a business
One of the most typical uses of a business loan is to fund the establishment of a brand-new enterprise. Though this is an exciting time, it can also be stressful if you don’t know what to do first. Some pointers to get you going are provided below.
Begin by checking the available information. Have a thorough understanding of the industry and a well-thought-out company strategy. Knowing your audience and how to approach them is crucial as well.
Second, be certain that you have assembled a competent group to carry out your plans. You’ll need the assistance of a lawyer and accountant to handle the legal and financial details, as well as a marketer and salesperson.
Finally, get ready to put in some serious effort. Launching a company requires significant investment of time and effort, but the payoff may be worthwhile. Make sure you don’t lose sight of your end goal by setting too high of a bar for yourself.
Consult with professionals in the field of finance if you have any doubts about whether or not taking out a loan will benefit your business. They can assist you in making an informed decision that is in the best interest of your company.
Expanding your physical location
Your office is so crowded that your new assistant had to begin work in the kitchen. It appears as though you have outgrown your original workplace. Or perhaps you own a busy restaurant or store and your clientele simply outnumbers the available seating.
Excellent news, indeed! It likely signifies business is growing, and you’re prepared to expand. But simply because your business is poised for development, doesn’t imply you have the funds on hand to achieve it.
Getting a term loan to help fund your large move may be necessary in these situations. The initial investment and the shift in operating expenses will be considerable whether you’re opening a second site or relocating an existing one.
Consider the potential impact on profits from the expansion of your space before making any final decisions. Would you be able to pay back the debt and yet turn a profit? Check the potential effect on your bottom line by comparing your current financials with a revenue prediction. Also, if you’re thinking of opening a second store, you should make sure the neighborhood is populated by people who might be interested in your goods.
Establishing a solid foundation for your financial future
A small, short-term loan can be useful if you need to establish your business credit in preparation for a larger loan application in the future.
When applying for a larger loan, a company’s age and the individual proprietor’s credit history are two of the most significant determining factors. A company’s credit history can be improved by taking out a modest loan and making timely payments on a regular basis.
As a bonus, this strategy has the potential to help you establish rapport with a single lender, which could come in handy when you’re ready to apply for a larger loan. But tread carefully; don’t rush into a loan you can’t now afford. If you have trouble paying back a modest loan, it could hurt your prospects of getting approved for larger loans in the future.
Acquiring the proper tools
How will you be able to provide products for your customers without equipment? The financing of business equipment purchases is usually a no-brainer. In order to manufacture your product or provide your service, you need expensive machinery, computer systems, or other equipment, and a loan to help cover the costs. In addition, the equipment actually can often be used as collateral for a loan if you finance it, much like a car would be for a car loan.
Think carefully about the financial impact of any equipment purchases before committing to a loan. A margarita machine would definitely be a hit with the staff. But unless you’re in the business of operating a Mexican cantina, that gear might not be worth the cost.
Increasing your inventory purchases
When it comes to costs, inventory is usually near the top. Similarly to how you would need to regularly invest in new pieces of equipment, you would need to constantly invest in new, numerous, and high-quality stock to meet customer demand. When you need to buy a lot of merchandise before you make any money, this might be challenging.
Sometimes, especially if you run a seasonal business, you just need to buy a bunch of stuff, but you don’t have the cash on hand to pay for it all. Prior to peak seasons like the holidays and summer vacations, business is slow, thus financing is required to buy merchandise at a discount.
Make a sales forecast using data from similar periods in previous years to determine if this is a good financial move for your company. To assess if taking out a loan to purchase inventory is a good idea, you should first determine how much money you will be borrowing.
It’s important to remember that sales numbers might fluctuate greatly from one year to the next, therefore it’s prudent to use sales data from numerous years when making projections.
Uncovering a business opportunity that’s better than the risk of debt
Once in a while, a chance presents itself that appears too wonderful to be true to pass up. Perhaps you’ve found a great deal on a larger storefront, or the opportunity to place a bulk purchase for discounted merchandise. The opportunity’s return on investment can be calculated by comparing the loan’s interest rate and payment with the amount of money you expect to make from the opportunity.
Say, for example, you manage a company that wins a $20,000 contract for commercial work. The problem is that you lack the necessary tools to finish the work. It would cost you around $5,000 to buy all the gear you need. Even after paying $14,000 in interest over the course of a two-year loan on the machinery.
It’s worth it to take on debt if the expected return justifies it. However, your math needs to be careful. Overenthusiasm on the part of business owners might lead them to make mistakes like underestimating costs or overestimating earnings. It’s a good idea to run a revenue projection with your other considerations so that you may make decisions based on data rather than speculation.
Hiring new employees
In a startup or a small company, you are expected to take on a variety of roles. However, managing the books, soliciting donations, promoting the firm, and answering customer support calls can be exhausting. Something will inevitably slip through the cracks if your tiny team is trying to achieve too much.
You should know that some companies believe that investing in their employees is the best approach to maintain a competitive edge and a culture of innovation. If there is a direct correlation between the hiring decision as well as a rise in revenue, this can be a smart move. However, if the presence of a helping hand allows you to keep your eye on the big picture, the expense of the loan may be justified.
Whatever your motivation for looking into a business loan, if, after analyzing all of the fees involved, it looks like getting the loan will boost your bottom line, then by all means, do it. Think twice about getting a loan if you can’t definitively link the money you need to an increase in profits.
You need to have faith in your business’s potential and your own ability to repay a loan over time. The corporate world is full of decisions that need some degree of risk taking. You are the only one who can decide if taking that chance is worthwhile.
Paying off debt
One typical reason people seek out lån til bedrift is to consolidate debt. Debt consolidation loans are one option, but there are others. One option is to combine all of your outstanding bills into a single monthly installment. You can reduce your interest costs and keep better tabs on your payments with this method.
Credit card cash advances are another option for obtaining a loan to settle financial obligations. If you need additional funds to pay down your high-interest credit card balances, this may be a viable alternative for you. The other option is to take out a loan, such as a home equity loan, to settle the obligation. If you have built up equity in your house but are strapped for cash, this may be a viable alternative for you.
A business loan can be used to refinance your mortgage and eliminate the debt. If you want to reduce your monthly payments but your mortgage interest rate is excessive, this may be a viable choice for you.
Debt consolidation, expansion, or something else—with a company loan, you need to look around for the best rates and terms.