Is It time to take out a business loan? Here’s how to tell

Published: December 20, 2017 by Gary Stockton

The commitment required to apply for a business loan may have you on the fence, unsure of whether or not to move forward. You’re not wrong to be cautious—rushing into any financing decision is a risky move.

But don’t talk yourself out of a prime opportunity to strengthen your business’s future. If any of the scenarios below apply to you and your small business, you might be ready to take out a business loan.

You Could Really Use That Extra Space (or That New Equipment, or a Few New Hires)

Expansion is a great reason to take out a business loan. The extra cash can help you expand your inventory to meet increased demand, cover a staff shortage, upgrade your work environment, or update your equipment.

This kind of expansion is focused on helping you do more business, which means paying back that loan is less likely to become a burden.

You Could Use the Cushion During Your Business’s Off-Season

Many seasonal businesses rely on loans to offset the slower months. Rather than slash prices and make panicked layoffs during your off-season, consider evening out your cash flow with a loan.

Be aware that many traditional lenders prefer businesses with more month-to-month consistency, so you may need to focus your search on alternative lenders.

Regardless, the right loan will help you ride those seasonal ups and downs without fearing for your business’s future.

Your Business Is Mature Enough to Secure a Great, Affordable Loan

Did your business just reach its third birthday? Has your business credit score finally recovered from that dip it took a few months back? Has your cash flow finally leveled out? You may have a shot at an affordable, low-interest term loan.

Remember the best time to ask for a business loan is when you don’t need one. If you’re company is in good financial standing you’ll be able to secure a top tier loan that will secure your financial future.

Traditional lenders are notoriously selective when lending to small businesses and may have rejected your applications in the past, forcing you to pursue to more costly short-term financing. However, if you suspect your business might be mature enough to impress a traditional lender, consider applying. You might find you now have a whole new world of attractive financing options open to you.

You Need to Start Building Credit for the Future

One of the best ways to improve your credit is by building up your borrowing history, and that means borrowing. You may have been prudent with your credit utilization in the past, but building credit takes time, and strong credit is a key factor in graduating to bigger and better financing.

If your borrowing history could use beefing up, consider taking out a business loan—it may help your credit score for the next time you go shopping for financing.

You’ve Just Received a Golden Opportunity

Perhaps a client or another business has made you an offer you’d hate to refuse, but you need a few extra resources to make it happen. If you’re confident the opportunity will expand your business and put you in an even stronger place financially, consider taking out a loan.

Many reputable lenders offer application processing times of a few days or less. If this golden opportunity seems like a perfect opportunity to expand, get moving.

When to Avoid Taking Out a Business Loan

In contrast to the “green light” scenarios described above, you should be wary of using a loan as a short-term solution to a long-term problem.

For example, think twice before taking out a business loan if you’ve already maxed out your current lines of credit. Build a plan for managing your current debts first. Many lenders will view those maxed out credit cards as a red flag when evaluating your loan application—not to mention the knock to your credit history.

If you’re considering using a loan to purchase some new business asset, but you’re not sure when (or if) you’ll be able to afford it, reconsider. The business plan you create when applying for a loan should detail what your new purchase will bring to your business and how that timeline aligns with your loan’s term. If you’re uncertain your new investment will pay for itself (or if your lender has offered you terms you suspect you can’t afford), taking on more debt may not be your best option.

Loans are also a poor solution for mismanaged finances. Be honest with yourself, particularly if you’re a solopreneur, about how well you understand where your money’s going. Hiring a more experienced bookkeeper or operations manager may be the more responsible long-term solution.

Get specific about your intentions for your loan and the health of your business, and take care you’re not seeking funding to gloss over unaddressed issues. Then, take the leap! Every smart investment in your business’s future helps it grow stronger.

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