When you might need a loan
As a small business owner, you put more than your sweat and tears into your business—you also put in your own savings and risk your personal credit to get your business off the ground. Loans and other financing options may not seem viable for a startup or you may be cautious about taking on business debt, but financing your business through a loan might be the right avenue to help you expand your business. Read on to find out if you should consider a loan for your business.
Securing a small business loan can be less expensive and better for your long-term wealth than relying on personal credit cards or emptying out your retirement accounts. Planning ahead and getting a small business loan can also help you leverage your existing personal savings and good credit score to help your business’s cash flow. This can be particularly important during the startup phase of your business when there are costs before you’ve generated any revenue.
Some common reasons to get a loan are:
- To help with startup costs. Most lenders require that you have been in business at least a year to show a proven track record. However, there are some alternative loans for those just starting out. Because there are so many unknowns when starting a business, make sure you have enough capital to last until your sales really kick in.
- To help with cash flow. Do you have customers that take a while to pay or a few who didn’t pay at all? Do you have a contract that requires you to wait 30, 60 or even 120 days or more to get paid after the job is complete? Planning ahead and having a short-term loan, or line of credit, to help pay employees and other costs while waiting can be critical for your business. You should speak to a lender well before you’ve depleted your cash reserves. It is often better to leverage your savings for a loan than to spend them and not have collateral when you need a loan later.
- It’s time to expand. Is your demand outpacing your production? It could be time to hire more people and/or purchase additional equipment. Do you constantly have a line out the door, or turn customers away? Expanding your physical space or building out a new location (or your first permanent one) is another good reason to get a loan.
- You need to invest in inventory. Plan ahead to make sure you have enough funds for inventory for future projected sales, seasonal sales or for the cost of a new product. Occasionally, you can use reward crowdfunding to get the needed funds, but other times debt funding is best.
- There is a new opportunity. Do you have a new client on the horizon, a potential partnership or new product that you need to invest in to grow? Sometimes taking a loan is the best way to prepare for a major opportunity or project.
While taking out debt isn’t a decision you should make lightly, it can also be a crucial tool for your small business success. Wondering what goes into getting a loan? Check out our Get Loan Ready Checklist and find out!