Getting a loan of any sort is a risk. The loan may be for nothing, especially if your company is unable to turn a profit.
When it comes to business loans, you’ll want to make sure that you’re going into debt for good reasons. Not every reason is a wise reason to apply for a loan.
The key is to ensure your reasoning will be profitable in the future. You’ll also need to guarantee that you can cover the monthly loan costs while still remaining profitable. Analyze your balance sheets to determine the impact of the loan.
Considering applying for a loan for business growth and expansion? If so, check out these 5 reasons to make an informed decision.
1. Build Credit
As a business owner, you know the importance of planning for the future. But, start-ups are less likely to quality for large loan amounts. You’re even less likely to be approved if you or the business lacks a strong credit history.
To build credit for the future, consider applying for a small business loan. Short-term loans are much easier to qualify for, especially for newer companies.
When building credit for future loans:
- Ensure you make payments on time
- If possible, pay the loan off early
- Choose a lender that you can do future business with
Build a good relationship with a quality lender. This way when it comes time to apply for a larger amount, you’ve already positioned yourself as trusted and low-risk.
2. Purchase Business Equipment
Need new IT equipment for the office? Found a new piece of machinery to speed up production time?
Equipment purchases are a wise reason to apply for a loan, especially if the equipment allows you to work more effectively and efficiently. To make matters even easier, you can take out an equipment financing loan and use the equipment as collateral.
When using a loan to pay for equipment, be sure to purchase needed items versus nice-to-haves. While your employees would love a sparkling new Keurig machine or this year’s latest iPads, they aren’t necessities. Purchase items that are business needs.
Before taking out a loan, create a price list. This will help determine the appropriate loan amount.
- You Need a Bigger Physical Location
As your company has grown, you’ve likely hired more employees. What once started off as a five person venture has doubled!
Or maybe your original retail store isn’t big enough to accommodate customer traffic.
While it’s great knowing that your business is growing, finding the cash to buy a new physical space isn’t easy.
If your company needs to expand physically, a business loan can help cover the cost. No matter if you’re moving altogether or buying an additional storefront, a loan can help minimize the huge up-front cost.
- Employee Hires
A growing business needs as much internal support as possible. While you’ve made it this far as the business owner, accountant, marketer, and customer service rep, wearing too many hats will take its toll.
To avoid burnout, you’ll want to grow your team. But, hiring new employees comes at a cost. You’ll need funds to pay:
- Employee salaries
- Onboarding costs
- Training costs
Did you know the cost of hiring an employee can top $5,000?
Unless you want to burn through overhead funds, a business loan may be the more suitable financial option.
Investing your money in fresh talent will keep you competitive. It will also improve your company’s overall efficiency. Hiring a marketing guru to develop a marketing campaign just makes sense!
- Inventory Purchase
Is your company’s busy season starting soon? Has a recent marketing campaign multiplied the number of new customers?
Seasonal companies know all about the rush of busy season and the need to maintain a steady inventory.
You’ll only achieve success when your company is able to keep up with supply and demand. A plentiful inventory ensures you maintain customer satisfaction. Happy customers equal loyal customers.
Going into debt to buy inventory to make a profit can be counterproductive if done improperly. Before getting a business loan, you’ll need to crunch numbers and look at past sales projections. Look at profits during the busy season.
Calculate your expected profit and then consider the cost of the loan. When comparing projected profit vs. debt, be conservative in your numbers. Projected profits are just that, so you don’t want to overshoot.
If you’ll come out ahead, a loan makes sense. But if the breakpoint is hazy, you may want to reconsider.
Be a Wise Loaner
As a business owner, you make the ultimate decision as to whether or not the risk of taking out a loan is worth it.
With the right reason, you can be confident in your decision to take out a business loan. If you can confidently pay back a loan while helping your business expand, don’t w