Taking out a business loan to expand your business venture often gets a bad rap. From naysayers to concerned friends and family members, you may encounter several people who’ll warn you of the worst possible risks and consequences of defaulting on your loan payment. Nonetheless, keep in mind that just like in any form of personal loan, you have the power to make your debt for you, not against you.
Let’s start by discussing why you’re considering business lending: will it be a bad debt or a good debt? Will it cause you to simply gain and lose money to interest rates or will it help you grow your savings and increase your profits in the long run? Make sure you’re going for the latter.
To get you started, here are 7 smart reasons for taking out a business loan.
1. You’re going to use it for startup costs
Are you ready to start a business? To set your business off to a good financial footing, a business loan can help. Business loans can give you the capital which can be used for launching, buying equipment, hiring people, and paying for a location.
2. You’re building credit for the future
Small, young businesses find it hard to qualify for larger loans because both the business and the owner don’t have a strong credit history. If you see yourself applying for a larger-scale business financing in the next few years, taking out a small, short-term loan today can help you build your business credit.
The trick is to borrow small amounts and make regular, on-time payments. This can also help you build a solid relationship with a specific lender. You can take advantage of this connection when you’re ready to go back for a bigger loan in the future.
3. You’re using the loan to expand your physical location
Planning to take your business to the next level by expanding your physical location? Perhaps you have an online business and your growing virtual store is now ready to accommodate more customers in bricks and mortar locations. Or maybe you already have a physical store that needs to be a little bigger to fit more employees and shoppers.
The good news is your business is booming! Business loans, like term loans, are a great vehicle for funding your upgrades. Don’t forget to do the math and ensure the revenue forecasts exceed the cost of taking out extra cash.
4. You’re purchasing key business equipment
Do you need certain machinery to make your product or perform your service? Do you need to replace old appliances with better, modern ones to make your day-to-day operations more cost-effective? Taking out a business loan is the way to go.
You can take out equipment financing, wherein the equipment itself can often serve as collateral for the loan. Just make sure to separate the “needs” and the “wants” when choosing the equipment to invest in.
5. You’re buying inventory
Just like equipment purchases, you need to replenish your inventory with plentiful and high-quality options to keep up with the demand. However, there may be times when you need to pay for a large inventory (like for an upcoming holiday or tourist season) even if your cash flow is still not enough.
If you’re running low on cash to purchase inventory (and you’re anticipating a good return on investment), you can rely on business loans to tide you over. Again, do the math: formulate a sales projection based on past years’ sales around the same time and calculate the cost of the debt. Compare the amount to your total projected sales to see whether taking an inventory loan is a good move.
6. You’re managing a cash flow crisis
Is your business struggling with a cash flow crisis? Without sufficient funds coming into the business, it won’t be long before you’re unable to pay your staff and creditors.
You might have been warned: it would be a big risk to acquire a new debt to pay off another debt. However, there are instances when taking out a new loan is the only way to resolve a cash flow crisis and keep your business alive.
7. There’s a huge business opportunity that outweighs the loan costs
Let’s say you’re presented with a limited-time business opportunity that’s too good to pass up. Perhaps you have a chance to order inventory in bulk at a discount or maybe you’re offered a once-in-a-lifetime partnership wherein you need to buy specific equipment to do the job.
If you feel like the return on investment of that opportunity will outweigh the cost of the loan, then taking out a business loan is a smart choice.
Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which connects clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.