It’s time to invest in your business assets, be it a better location, new talent or updated machinery… and you’ve toyed with the idea of a business loan.
You’ve probably explored a million and one funding options, knowing funds from family, friends and credit cards isn’t an effective solution. But still, you hesitate taking on debt.
Is it time? Are you ready?
Let’s explore some possibilities.
Is the timing right?
An honest evaluation of your business will help you decide if taking on debt is the right “next step” or something that isn’t in your best interests.
A few questions to consider include:
- Is your business profitable or operating at a loss?
- Are you borrowing funds to remain in business?
- Do you want loan funds for a want or a need?
- Do you have a strong business plan already written?
- What kind of personal AND business credit history do you have?
- How would you spend the borrowed funds?
- Will the investment directly impact revenue? Does that matter?
- Can you afford loan payments, even if accounts receivables were significantly late or if you lost a major client?
- What assets do you have available that a bank would consider as collateral?
- How will the borrowed funds provide a positive ROI or increase the value of your business?
Understand what type of loan you need
Business finance is complicated. Because there are dozens of types of business loans–short-term loans to cover temporary cash flow problems, equipment purchase loans, commercial mortgage loans–it’s important to understand the type of loan you need. After all, the “loan du jour” at the closest branch of a big bank might not be the best choice.
Once you understand exactly what type of loan you need, it’s easier to consider alternative funding options for that loan.
Not all banks or online lenders provide all types of loans. As a consumer, for example, you wouldn’t pay for a new car with a second mortgage on your home or a credit card – business loans are similar. You also wouldn’t go to a bank that specializes in consumer lending for a commercial loan.
There are dozens of types of loans, and you’ll want to match the need with the right lender, type of loans and terms you can afford.
It helps to discuss these things with a qualified banker (see our recent article on Right Financing) or spend time educating yourself online about options.
Looking for more information on smart reasons to get a business loan? We like this article on Entrepreneur.com.
If you’ve done your research and explored your options, but still feel uncertain it’s the right move, all is not lost. You have several other options.
The ultra-conservative choice: save
To pay for new assets without taking on debt, the most conservative option is to take it slow and save your profits until you can afford the purchase, or wait until profits can consistently support an increase in payroll or accounts payable demands.
This zero-risk choice is safe, but the time required might be impractical or even harmful to your business.
If you’d like to move a little faster, a combination tactic might serve you well: saving until you have a significant portion of the funds you need, then financing the rest. After all, who says you need to borrow 100% of the amount you need, right?
Just remember to keep enough cash on hand for emergency situations, such as a shortfall with payroll, or covering slow account receivables.
First things first: review your business plan!
Once you’ve evaluated the options and you start to consider taking a loan, it’s always good to go back to the core of your business before you move forward. Review your business plan and improve it. Include financial projections for the next 3-5 years and make sure everything is in order.
By doing that, you will get a clearer vision of your future goals and will be able to make a more informed decision. Having everything organized in one place will also help your case in the bank in case you do decide to take out the loan.
Ready to talk to a banker? Give us a call today and schedule an appointment with a small business specialist. We’re here for you, no matter what’s on your horizon.