For many business owners thinking to set up a shop or want to undertake a company expansion, finding a small business loan is perhaps the best option to finance such activities. With a lot of lenders out there offering various loan terms to small business owners, finding the optimal financing options can sometimes be tricky for some businesses.
Even as the brand of your small business grows, you will tend to face several challenges in your effort to make it sprout. For instance, if you have the ambition to expand beyond the local market, you will have to know that you will compete will several other companies some of which have a huge operation. It implies that you will have more employees, more products or services and perhaps a warehouse or bigger office; which will normally consume a much bigger budget.
That is why taking out a loan comes in handy when you do not have adequate capital. But knowing when it is right to take that small business loan is amongst the most difficult decision that ponders the minds of most small business owners.
When is taking a small business loan a bad idea?
That is a prudent question indeed! Before you select a proper loan financing, it is normal to question whether to take such a business loan just yet. When the business has introduced new products that have not taken root to market or when the business seems running at a slow rate, it is usually not a good moment to take the loans.
It is also essential not to assume that an application for the loan is synonymous with obtaining a loan. In essence, the loan application procedure is usually tedious and sometimes quite long with at times endless conditions to meet to qualify it. Even more astonishingly, if you fail to repay the loan, you even risk losing your collateral – up to your business.
Poor economic times are also not the appropriate times to obtain the loan financing. Many business owners see it not the most rational moment to take huge financial decisions such as pursuing a loan. The simple reason is that you might fail to make a rational choice when you are under fear or emotions as it impairs your decision making.
Because of the uncertain risks that prevail, the proper thing to do for the business at that moment is to step back and wait till things work out in your favor.
When is it not a good idea to take a loan?
Now that you have a clear understanding when it is not proper to obtain a business loan for your small business, it is time to consider when it may be good to take the loan for your business.
There are situations that will be highlighted which will indicate whether your business needs a loan; some involve the need for fast cash to cater for the temporary needs while others are for future planning.
The following are scenarios that show that taking the loans is the necessary step:
Business credit building
Sometimes you may find out that your business may not require cash at the moment, but when you look into the future you may find out that it may probably need it. For you to realize the amount of loan you need, you will have to estimate the amount necessary for making physical expansions (retail, office or warehouse space) large equipment purchases or even to update the technology.
Essentially, besides obtaining the loan, timely repayment of small loans will improve your credit score. If you are a new small business that lacks a credit history, taking on such small loans can make you ready to take on bigger loans for the business another time.
Better loan terms negotiation
At the time of the great recession aftermath, many businesses were in a disadvantageous position as the terms at that time tended to favor bank at the expense of the businesses. In case you took out a loan at that time, now is a nice time to acquire a new loan so as to refinance the old debt. As you make the monthly payments, you may realize that you will be saving a lot of interest money; but that depends on the interest rate and existing loan terms.
While the great recession can be a good reason while the current loans are less favorable, there are also other valid reasons. Loans can be taken at a higher interest rate for businesses that are not yet fully established. Therefore, it goes without saying that you will save a significant amount of interest money, thus, raise your current creditworthiness status when you eliminate bad loans to replace them with new ones.
One of the solid reasons for obtaining a loan is growth as it indicates that your business is on a good path. When you notice that your business is doing so well such that as it accommodates all the physical inventory or employees, it seems like it’s literally bursting out, it may be time to think of expanding the current property. For instance, you may decide to open a restaurant or another shop.
Business performance being good is not synonymous with having immediate cash to finance the expansion. However, the owners of small business need to carry out a business forecast to know the additional revenue they will need to cater for the loan repayment.
New equipment purchase
Loans are usually a great financing when it comes to business equipment or technology investments, whether it is a purchase or an upgrade. In case you have sufficient creditworthiness and stable income, many of the lending institutions will be receptive to such items to form a large part of the collateral.
Advantages and disadvantages
Advantages of securing small business loans
The current extremely low interest-rate is the biggest advantage that business owners see in loans. It seems that banks are gaining the courage to lend again after the great recession scare that took place in 2008. Therefore, better interest rates that businesses can enjoy now, shows it is the perfect time to take a loan instead of waiting for a couple of years.
When you choose to apply a small loan for your business now, you will get a clear idea of how to make your business look attractive to lenders even if your application is rejected. Some owners of businesses are afraid embracing rejection, but, they fail to understand that it is a natural course of a business. If taken well, it is an opportunity to learn and grow your business.
The good thing is that you will not be personally liable for any risk as long as your business is a corporate entity. When it comes to reclaiming the money, banks will liquidate the company to repay the loan.
Disadvantages of taking a business loan
Obtaining a small business loan brings about a couple of disadvantages as well. Interest is a big detriment since you will have to pay interest to the lenders on the money borrowed even if it is remarkably low. The requirement for a certain collateral amount before approval is another disadvantage that comes about from taking business loans.
Terms of the loan can also be disadvantageous. Before reaching an agreement on the loan, take enough time to understand the loan terms. You can even ask the experts for clarification where you fail to understand some of them. Unless you understand the potential ramification that loan terms bring, it is wise not to agree to them.