If you tell people that you’re opting to take a loan for your business gives you all types of opinions. Everyone will have a history to tell you, either good or bad. Some may be from past experience, and others create what they think in their mind.
Fortunately, most people have taken a loan and expanded their business. It has helped them to thrive on their startups or business expansion. When you take out some money for your business, spend it wisely. For instance, it is a good idea to spend it on social media marketing, such as video and YouTube marketing. You can help your business grow by gaining subscribers through Jaynike for your YouTube advertising.
Before taking a loan, ask yourself these vital questions.
#1. Is Your Business Ready to Expand its Physical Location?
If you find yourself outgrowing your initial office location, it means your business is growing. It’s now time to expand it. Perhaps you’re running a retail store or restaurant and realized that your business now has more customers coming in and out, yet they don’t fit in your space.
That means great news for a business. It means you’re booming and now ready to expand. However, your business may be ready, but you don’t have cash. So, what would you do?
You, therefore, have to think about a term loan to help finance such a big move. It could be expanding your location or opening the same business in another location. It means your upfront cost will be high, thus significant to get a loan.
Additionally, don’t commit yourself to taking a loan without taking steps to measure your potential change in revenue after expanding the space. Consider whether your business can recover the costs for your loan and still be profitable for you.
To do that, you need a revenue forecast and an existing balance sheet to determine how you will impact your bottom line.
Perhaps you’re opting to start another retail store. You have to research the area and ensure it’s a good fit for your business.
#2. When Building Future Credit
Perhaps you want in the future to get large-scale financing to support your business. When that time comes, with poor credit, it will be a hassle. So, the right thing to do is build your credit score by starting small.
Commonly, small businesses find it hard to qualify for a large loan, particularly when the owners don’t have a high credit score. You can do that by taking smaller loans, make needed regular on-time payments and follow your credit history. This will improve your scores for future benefits.
Besides, such a relationship helps your business to build better relationships with lenders. This gives you a connection when looking for bigger loans. You have to be careful because you shouldn’t take a loan that you can’t afford to pay. That’s because even a mistake of late payment could block your chances of qualifying to get a future loan. It could have been better for you not to apply for a small loan.
#3. Purchasing Equipment For Your Business
In your business, you could need expensive equipment that can change how you operate. Perhaps the equipment or machinery could help with the performance and efficiency production of your products. Without enough money, it could be hard for you to get the machine. When you take equipment financing, it could serve as collateral for the loan you get, which acts as a car loan.
If you’re for the equipment before you can take a loan, ensure to separate between actual and nice-to-have for your business bottom line. Sometimes, expensive equipment couldn’t be the best for your investment. Pick what is vital for your business when you’ve to buy it with a loan.
#4. Purchasing More Inventory
In a business, inventory is the largest expense. It’s similar to the purchase of expensive equipment. You, therefore, have to replenish your inventory to help you manage the demand. You can do that when you replenish your inventory using plentiful and quality options.
Sometimes, that’s difficult when you’re planning to buy a large amount of inventory, particularly before seeing your ROI. Moreover, it becomes even more challenging for a seasoned business.
To measure and determine whether it’s a wise move, you should create a sales projection depending on past year’s sales. Also, calculate the cost of your debt and then compare it with your total projected sales. You will decide whether taking an inventory loan would be a wise financial move.
Remember that sales figures vary widely between years; you have to be conservative. You need to also consider the number of years of your sales figures in your projection.
#5. A Business Opportunity Outweighing Potential Debt
From time to time, you will find a business opportunity that will fall on your lap. Some of these opportunities are too good not to pass up.
Perhaps you get a chance to order inventory at a discount. In such instances, you have to determine your ROI of the opportunities. You can weigh the cost of your loan and revenue stand for you to generate available opportunities.
For example, you get a commercial contract worth $20,000. And your challenge is that you have no equipment that can complete that job. If you’re to purchase good equipment, it can cost about $5,000. So, by taking a two-year loan to buy the equipment and pay an interest of $1,000, you will make a profit of $14,000.
When you realize that return on investment has outweighed the debt, you have to go for it. You also have to be careful with the calculations. Don’t underestimate the true costs or even overestimate your profits.
#6. When You need a Fresh Talent
If you’re working on a small business or even a startup, you have to wear lots of hats. As the business continues to grow, there comes a time when you’ve to do fundraising, bookkeeping, customer services, and marketing.
Perhaps you realize that the small team you have does many things that may be a problem in the future. Something could fall through the cracks to compromise your business model.
Some businesses are opting to invest their money in talents to keep their businesses innovative and competitive. It’s a great move you could have, but there should be a clear connection between the increase in revenue and hiring decisions.
Additionally, an extra set of hands could help your business focus on a bigger picture. This could be a significant idea to get a loan.