7 Ways to Know It's Time for Your Business to Get a Loan
Taking out a loan can be a difficult, stressful decision. No matter what loan product you choose, which bank or lender you borrow from, or what you use the influx of cash for, you’ll have that debt in mind until you finish repaying it.
Small business loans outstanding in the first quarter of 2015 alone totaled $595 billion nationwide. Unnecessary loans can add anxiety to your life and interest rates to factor into your budget, but not searching for a loan when you do need one can be disastrous for your business. How do you know when to act?
There’s a lot of information floating around about different loan options, but not as much advice on whether you should take out a loan at all. To help you figure out what financial step is best for your business, we’ve come up with seven big ways for when it’s time to take out a loan.
1. Emergencies!
This might be the most obvious time to take out a loan: when something goes terribly wrong, and you need to fix it fast. Whether pipes burst, a vehicle breaks down, or critical inventory falls off the back of a truck, you need some quick funding to resolve the issue.
If something happens and your first thought is “How can I pay for this?” then a short-term loan, which you can often secure in days--if not hours--is a helpful (though expensive) option. The SBA also offers a Disaster Loan Program with lower interest rates but more selective eligibility than your typical short-term loan.
2. Issues with equipment, inventory, or staffing
Functional and up-to-date equipment helps to establish a sense of reliability with customers. A fully-stocked inventory prevents you from missing out on potential revenue. And enough employees need to be working enough hours, or else your business won’t reach as many customers as it might otherwise.
These aren’t catastrophes that require immediate fixes, but deeper issues you’ll need to resolve. Optimizing your business means maximizing revenue, and sometimes doing so without dipping into your operational funds requires obtaining a small business loan or line of credit. Remember: it might feel risky to take out a loan, but ensuring that the money you take out will multiply can make it a smart decision.
3. Protection for seasonal businesses
Not all seasons are created equal… at least, not where snow plow companies, costume manufacturers, and sunglasses stores are concerned. The National Retail Federation’s annual Halloween consumer survey predicts that 157 million Americans will spend $6.9 billion on costumes, decorations, food, drinks, and other goods for the holiday, with 40 percent of that shopping taking place in the first two weeks of October alone.
So if your business operates seasonally, much, if not most, of your revenue will be concentrated in a certain period of time each year. Loans or lines of credit are perfect products for small business owners during the off-season. ‘Tis the season for maintenance and repairs, diversification planning, aggressive marketing campaigns, and paying off equipment leases in the slower months.
4. Increased working capital
Maybe you haven’t experienced any emergencies, issues with equipment of inventory, and aren’t on a seasonal business model, but you still feel strapped for flowing funds. Working capital is cash consumption for day-to-day operations that don’t necessarily relate to profits or losses. (Payroll is an example of this.) Working capital is the most fluid of your assets, easily and immediately available, covering you for all sorts of different situations.
So whether you’ve been experiencing a soft month or have a credit customer that's slow to pay their bills, you might consider taking out a loan to meet your short-term operational needs.
5. Build business credit
As a small business, building up “business” credit can be a long and excruciating process. No business owner wants to use their personal credit score to secure business credit, but until your business has reported payment history to the business credit bureaus, that will be the case. So, if you want your suppliers, lenders, etc. to start referencing your business credit score, you’ve got to start building a business credit history.
One of the best ways to do this is to take out a business loan. Even if it's just for a small amount, the process of taking out credit and paying it down (on time) will help build up that history. Then, when you’re ready to go for larger loan sums or huge trade contracts, a healthy business credit score will help you secure the best deal and ensure lenders put less emphasis on your personal credit history.
6. Expanding your business
Do you have plans to enlarge your office, open additional locations, begin a huge marketing campaign, acquire new talent, or start exporting your goods? In other words, do you plan on expanding your business? If you’re feeling secure, then the answer should always be yes!
Taking out a loan to improve or diversify your operations is a great idea. That way, you don’t have to dip into your working capital or personal funds to increase your business’s reach, revenue, and success. So long as the funds received from your new growth outweigh the payments on your loan, you’re in the clear.
Typically bank loans or lines of credit will offer the best deals for small business owners looking to expand. They offer long terms and the lowest interest rates, and since you’ve already proven your business is successful enough to grow, banks are less likely to deem your loan request a risky venture. The SBA's CDC/504 Loan Program is a great place to obtain funding for equipment or real estate, while the more general 7(a) Loan Program can cover just about anything.
7. You’re doing well!
The Scout Motto is a good slogan for small business owners too: Be Prepared. The best time to apply for a loan is before you need it, not after. Your choices are always best when your small business is in a solid place financially.
If you’re in dire need of fast funds, on the other hand, interest rates will spike and your freedom will be limited. Whether it’s a line of credit or a longer-term loan, products offered by banks and alternative lenders will never be fairer than they are when your business is stable and successful.
Protect yourself against everything from unexpected market downturns to natural disasters, and be always ready to act on unforeseen expansion opportunities immediately, by having liquid capital on hand. With a good loan program in hand, you never have to panic, downsize, or dive into personal funds. Instead, you can deal with whatever life dishes out your way, which is half the fun of being a small business owner!
By being aware of the lending landscape, and by making smart choices about when, why, and how to take out a loan, you can avoid the biggest pitfalls of owning a business.
