Spreading the word that you’re considering a loan for your business can be met with all kinds of opinions. From general naysayers to cautionary anecdotes, everyone you meet will have a story as to what might happen if you take out a loan to start or expand your business venture..
Your cubicles are busting at the seams, and your new assistant had to set up shop in the kitchen. Sounds like you’ve outgrown your initial office location. Or maybe you run a restaurant or retail store, and you have more customers in and out than you can fit inside your space.
This is great news! It likely means business is booming, and you’re ready to expand. But just because your business is ready for expansion, doesn’t mean you have the cash on hand to make it happen.
In these cases, you may need a term loan to finance your big move. Whether it’s adding an additional location or picking up and moving, the up-front cost and change in overhead will be significant.
If you’re planning to apply for larger-scale financing for your business in the next few years, the case can be made for starting with a smaller, short-term loan in order to build your business credit.
Young businesses can often have a hard time qualifying for larger loans if both the business and the owners don’t have a strong credit history to report. Taking out a smaller loan and making regular on-time payments will build your business’s credit for the future.
Purchasing equipment that can improve your business offering is typically a no brainer for financing. You need certain machinery, IT equipment or other tools to make your product or perform your service, and you need a loan to finance that equipment. Plus, if you take out equipment financing, the equipment itself can often serve as collateral for a loan — similarly to a car loan.
Especially if you have a seasonal business, there are times when you may need to purchase a large amount of inventory without the cash on hand to do so. Slow seasons precede holiday seasons or tourist seasons — necessitating a loan to purchase the inventory before making a profit off it.
Every now and then, an opportunity falls into your lap that is just too good to pass up — or so it seems, at least. Maybe you have a chance to order inventory in bulk at a discount, or you found a steal on an expanded retail space. In these instances, determining the return on investment of the opportunity requires weighing the cost of the loan versus the revenue you stand to generate through the available opportunity.
If the potential return on investment outweighs the debt, go for it! But be careful with your calculations. More than one entrepreneur has been guilty of underestimating true costs or overestimating profits as a product of over-enthusiasm. When you’re weighing the pros and cons, it often helps to perform a revenue forecast to make sure you’re basing your decisions on hard numbers rather than gut instinct.
Some businesses choose to invest their money in their talent, believing that this is one way to keep their business competitive and innovative. This can be a great move, if there’s a clear connection between the hiring decision and an increase in revenue. But if having an extra set of hands around helps you focus on the big picture that alone may be worth the loan cost.
Regardless of the exact reason you’re considering a business loan, the point is this: If, when all costs are factored in, taking out the loan is likely to improve your bottom line – go for it.
After graduating year 12, Dan began his banking and finance career at Westpac Banking Corporation in Brisbane in 1988. He worked for the bank for seven years, excelling in his career and working his way up to management.