Wanting to get a business loan is not a valid reason. Without a proper plan, getting a loan may do more harm than good. If and when you think your business is ready to expand its horizons, but you do not have the working capital to do so, then you should get a loan. Loans are beneficial for your business as they help you grow your business.
Let’s discuss how loans are beneficial for your business and how you can grow your business:
Expand Your Physical Location
Once your business has outgrown its location, it is time for you to expand your physical location. This is great news, because your business is most likely booming, but if you do not have the money, then you are out of luck. Or are you?
In such cases, you can always get a term loan to expand your business operations. Whether you plan to get a bigger physical location or move to another location altogether, you will need a significant amount of money to deal with up-front costs and change in overhead.
Before you get a loan, make sure you evaluate the change in revenue from expanding your physical location. Will you be able to pay off the loan and still make a profit? To see how the move will affect your business, use your existing balance sheet with a revenue forecast. If you are getting a second retail location, then you need to do your homework regarding the area where you plan to set it up. This way, you will be able to determine whether it is a good move for your business or not.
Build Credit for Later
With your business on the right track, you may need to apply for large-scale financing in the future. The only way you can secure such financing is by getting a short term loan or many, just for the sake of building credit for your business when you need it later on.
The primary reason why small businesses are unable to secure larger loans is their credit history is not strong enough. By taking out a smaller loan and making payments on time you will be able to build a business credit worth reporting.
This tactic will also help you build a strong relationship with the lender you are working with, giving you an important connection for later when you need a much bigger loan. It is worth noting though, if you can’t afford a loan, then don’t take one on so early. A single late payment could do the complete opposite — negatively affecting your chance for securing finances in the future.
Buy New Equipment for Your Business
This is pretty straightforward if you think about it. A business needs new equipment to improve operations and run things smoothly.
Certain machinery will be required to make your product or offer the service you provide, for which you need a loan. By taking out equipment financing, the equipment you get will serve as collateral, so you really have nothing to lose. Just make sure you decide what equipment is most important. The last thing you want is to incest in equipment that does not favor your business.
Purchase more Inventory
When it comes to inventory, it is by far one of the biggest expenses that any business has to deal with. Just like equipment purchases, you need to keep with up with demand by ensuring your inventory is of high quality and plentiful. Of course, this is not an easy task to accomplish because you will need to invest heavily on large quantities of inventory before you actually see a return on investment.
Managing your inventory effectively is even more important if you run a seasonal business. There may be times when you need to purchase a massive inventory without actually having the money on hand.
To measure if this is a good move for your business, you will need to create a sales projection based on results from the year before. Calculate the cost of the debt and compare it with your forecasted sales to conclude whether taking an inventory loan will be a financially sound decision for your business.
There will be opportunities that may be too good to pass up. These business opportunities are rare, and can save you a lot of money or increase sales.
For instance, you have a limited time to buy your inventory at a discounted price, or while looking for the perfect working space you found one that fits well within your budget, in both cases you will fare better by taking a loan.
Basically, if the potential return on investment is far greater than the cost of the debt, then there is no reason why you should not get a loan. However, enough emphasis cannot be placed on the fact that you will need to be careful with your calculations. There have been cases where businesses underestimated the real costs or overestimated their profits due to over-enthusiasm. Rather than going on instinct, base your decisions on hard numbers by performing a revenue forecast.
These are just a few benefits of business loans. Regardless of the reason for getting a loan, make sure going through the hassle is worth your time and money. If there isn’t a connection between revenue and financing, reconsider getting a loan.
All of this only works if you are confident about your business being able to pay back the loan in the allotted amount of time. This is the only way your business will succeed. There is no denying the fact that almost all business decisions involve taking risks, but that does not mean you take unnecessary risks.