Small businesses have a unique structure and unique needs. As such, the financing they require during different times of their life cycle or at certain milestones means they need to look for adequate options.
But taking out a loan for your business isn’t a small decision – you don’t want to borrow more than you can repay, and you’ll have to pay interest either way. Depending on what you need the money for – you may be able to negotiate some more favorable terms. However, as a general rule of thumb – think twice before taking out a small business loan. Ask yourself – is this something you really need? Is there any way to finance out-of-pocket or even consider borrowing from friends and family as that eliminates the interest.
With small business loans – timing is equally important. Take it out too early and you’ll end up paying more interest than you need to, plus you may not be able to make full use of the cash. Too late and you risk getting jammed into a predatory loan and end up paying exorbitant interest and fees. So how do you decide when you should take a small business loan?
There are several milestones in the life cycle of a small business when a loan can propel your venture to the next step of its growth. Essentially, opportunities come in various forms. You may find your business is getting a contract from a big client or struggling to meet the demand for your products. Either way, these are good signals that your business is ready to expand. Here are a few of the most common scenarios when taking out a small business loan is the right move:
- Balancing the sheet during difficult times to avoid bankruptcy
- Renting a new location to open a new office as part of your expansion.
- Hiring more staff to keep up with demand and focus on accelerating growth and working capital
- Purchasing inventory to keep up with seasonal demand.
- Investing in equipment could help improve the efficiency of your operations.
Each of these situations makes for a valid reason to take out a small business loan. Naturally, you should still carefully consider the pros and cons before going through with the decision.
It’s actually quite common for business owners to overestimate potential profits and underestimate the true costs of a small business loan. This mistake is why it’s important to have a quantitative assessment of the opportunity to guide your decision. A quantitative assessment could include using your historical financial records and creating a revenue forecast. Then you can use the figures to see if the return on investment will be enough to justify the loan.
Evaluate your situation carefully before you decide to get a business loan. The benefits of the opportunity should always outweigh your cost to justify it. But don’t fall victim to online lenders who promise flexible terms, low interest rates and fast approval times. Getting stuck with a small business loan from a less-than-legitimate lender will end up costing you more in the long run. It can even run the business you spent so much time, efforts and money on into the ground.
VIP Capital Funding offers many small business financing solutions. If you find that you’re in a good position to get more funding and move your business forward, get a quote to see how much you’re eligible for.