Taking out a business loan can feel almost like a leap of faith. Business owners can be hesitant to pursue this option because of a worry that they won’t be able to handle the payments, a negative connotation of receiving outside help for their business or just an aversion to the whole process.
It’s true that you shouldn’t go into taking out a loan blindly, but with the right planning, a business loan can go a long way in increasing your profits. In fact, NDP Analytics’ report on The Economic Benefits of Online Lending to Small Businesses found that for every one dollar in lending to small businesses, sales of small business borrowers increased between $1.05 and $2.84 (with an average of $2.31).
If we have your attention, good. Now it’s time to look at the considerations you should make before getting a business loan.
Consider the Timing
Too often, businesses seek out loans in a time of need. It can actually be more beneficial to take out a business loan before you get to that point. Not only will this help build your business credit, but it can also bolster your ability to expand your business.
If the business is going well and you’ve been considering opening a new location, providing additional services or increasing your staff to meet demands, these are all indicators that it may be time to look into a business loan.
The biggest deciding factor in determining whether your ROI will be enough to manage the repayments of your loan. Closely inspecting your cash flow will set you up for success for both your business and loan repayments.
Decide How the Money Will Be Used
You should create simple cash flow projections every year to help you have a better understanding of where your money is going and how it can be used to capitalize on your gains. If you’re thinking about taking out a business loan, how will that money be used?
If you will be using your loan money to encourage business growth, create a detailed plan for how that will be executed. It can be a time-consuming process but is ultimately worth laying the foundation.
If you’re using the loan money to keep your business afloat, it’s time to reassess the reasons why your company is struggling. Not only can this help to correct your course, but addressing business shortcomings will ensure that taking out a loan doesn’t end up landing you in a deeper hole.
A well-thought-out plan can help keep you accountable with your finances and pave the way for a successful future.
Project When You’ll Turn a Profit
Not only should you plan what the money will be used for, but you should also project when that investment will turn a profit for your business. Making this projection should include the amount of the loan, any fees and interest that will be accrued over the payback period, the cost of your upgrades/changes, and the expected return of investment. Your ROI should be projected by researching your industry and your current business standing.
Borrowing the Right Amount
When taking out a business loan, your goal should be to hit that Goldilocks zone; not too little, not too much. Figuring out the amount that’s just right will require you to calculate a variety of scenarios in regards to amounts and APRs. Take your projected expenses as a starting spot and work up and down from there.
A Final Word
Business loans should give your company the opportunity to fulfill its growth potential. Taking out a business loan will build your business credit, allow you to access funds for expansion, and retain your ownership/equity in the business.
Proper planning and research will guide you in deciding how much to borrow, when to borrow it and how to execute a business plan that promotes the success of your company.Get Started Now