When Should You Apply For A Small Business Loan

If you are considering a small business loan, then you might have a multitude of thoughts running in your head not to mention getting all kinds of opinion of whether that is good for you. Everyone you ask will have an opinion of whether taking out a small business will be good for you or not further adding to the confusion. Yes, it’s true that every reason to take out a small business loan is also an opportunity of saddling your business with debt. However, this does not mean that good reasons don’t exist for investing in your business. If you feel that your business might benefit in the long term with an injection of capital then here are some reasons why you should do it:

  • To Expand Your Physical Location

Have you reached a point in your current location where your assistant is setting up shop in the kitchen to get work done? Maybe you run a veterinary practice and need more space to optimize your profits?  If yes, then it’s time to think about expanding your veterinary office space by applying for loans for vets.

No need to feel tense though. This actually is good news for you as it means that your business is thriving.  But, just because your business is doing really well it does not necessarily mean that you have the financial resources to expand your office space. In such a scenario you may need a loan to finance your expansion. Now depending on whether you want to expand your current office location or packing up and moving in to a new location the upfront cost as well as change in overhead can be significant.

Before you commit on a change of location it’s important to factor in the potential variations in income that can arise out of the office expansion. The question you need to ask yourself is can you cover the additional loan costs and still be in the profit? Along with your correct balance sheet use revenue forecast to predict how the move might affect your balance sheet. If you are intending to relocate to a new office space then ensure that you research the area first. This way you can ensure that your new target audience is the perfect fit for your business.

  • Building Credit For The Future

If you are intending to apply for a large scale loan in the near future then it’s better to apply for a short term loan now to build your business credit. New businesses can often find it hard to get sanctioned for larger loans because of the following two reasons:

  • Owner doesn’t have a great credit history personally.
  • The business doesn’t have a great credit history.

Therefore, making regular payments on your short term loan will assist you in building up your business’s credit for the future. This strategy can also assist you in building a personal relationship with a specific lender which might be a significant contributing factor when you want to go back for a bigger loan.

The important thing to remember here is to not take out a short term loan which you can’t afford. A single late repayment in your short term loan can severely hurt your chances of being eligible for a larger loan.

  • To Buy Equipment For Your New Business

You might need machinery or tools or IT equipment for your new office and to buy them you might have to apply for a small business loan. Also, if you take financing for equipment (also known as equipment financing) then the equipment can act as the collateral for your loan.

However, before you apply for equipment financing ensure that you know exactly what you want for your new office. Don’t invest in equipment just because they caught your eye or they are fancy. Yes, any employee would love to have a margarita machine but unless you are intending to open a bar, that particular equipment might not be a great investment for your business.

  • To Purchase More Inventory

Similar to equipment financing inventory can be considered one of the biggest expenses in setting up any new business. You will always have to replenish your inventory with multiple high quality options. This can prove to be tricky if you have to purchase large amounts of inventory before you see any ROI or return on investment.

Now if you own a seasonal business than many a time you might have to purchase large amounts of inventory without much capital in hand. Often a holiday season where you usually do the bulk of your business might be preceded by a ‘slow season’. This means that you might have to apply for a loan to buy your entire inventory before you see any profits. Now how will you determine if such a financial move be right for your business? In such a situation it would be wise create a sales projection based on the sales around the same period in the past few years. Estimate the cost of debt and then compare it with your total of projected sales to determine if taking out an inventory loan is a wise move or not. Also, remember that sales figures can fluctuate on a year to year basis. So check the sales figures for multiple years in your projection.

  • Finding A Business Opportunity That Far Outweighs Any Risk Of Debt

Sometimes an opportunity comes around that seems just too good to pass up on. It could be an offer to buy inventory in bulk at a discounted price or new office location at an unbelievably low price. To determine return on investment in such scenarios you need to weigh the cost of loan against the profits that you stand to generate through this opportunity.

For example, if you are running a business in which you get a contract for £20,000 but you don’t own the equipment yet to fulfil the contract. Buying the required equipment might cost you around £5000. Now if you take out a two year loan and pay, say around £1000 in interest you will still be left with a profit of £14000.

If the return on investment far outweighs debt then such an opportunity should be grasped with both hands. However, ensure that you don’t get over enthusiastic. Many budding entrepreneurs make the mistake of overestimating profits and underestimating the extent of true costs for the business. If your find yourself indecisive then it’s better to base your decisions on hard numbers rather than following your gut instinct.

  • Having To Invest In Fresh Talent

If you are running a start-up or a small business then you have to juggle multiple responsibilities simultaneously. But there might come a time when juggling everything can become overbearing and hurt your business. If your relatively small workforce is being overstretched with work then eventually something might happen that disrupts your business model.

Some entrepreneurs choose to invest in fresh talent as they believe that this can run the business smoothly and competitively. If there is a direct co-relation between the decision to hire fresh talent and an increase in revenue then it can turn out to be a great investment. Hiring an extra pair of hands might sometimes help you refocus on the big picture which in itself might be worth the investment.

Irrespective of why you are considering taking out a business loan it’s important to evaluate whether taking out the loan is going to improve your balance sheet. If it does then regardless of the challenges you encounter its best to go for it. However, if you remain unconvinced and the numbers don’t back up the need for further investment then its best to think twice before making any further commitment.

About the Author

Molly French

I have worked in many banks across the United Kingdom and have seen people make huge mistakes in mainly paying back debts. I'm here to help you keep your wealth bar above average.

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