If you own a business or are thinking of starting one, you may be tempted to take out a loan to inject some more capital into your business, but should you? The answer is yes and no. There are some really bad reasons for taking out an additional loan to expand your business (because you’ve already maxed out your credit cards, for example) but there are also lots of instances in which taking out a small business loan is actually a very smart idea. That’s what we’re going to focus on here.
You need a bigger location
Let’s say your business is doing really well, but your physical office or inventory space is no longer able to meet your needs. That’s a great reason to apply for a business loan to expand your operations. Otherwise, trying to work out of your current space could end up hampering your business’ ability to grow to its maximum potential. If your business has outgrown the space, it likely means you are doing well, and are therefore in good financial spot to be able to afford to pay back a loan, but be careful. Will the increase in operation costs for a bigger space, plus the cost of repaying the loan, still allow you to turn a profit?
You may want to build up your credit
If you have your goals set on a large financial request in the future (such as financing another location) it may benefit you to take out a smaller loan today. Doing so (and paying it off on time, of course) will help you to build your credit for the future, bolstering your chances of being accepted for the bigger “ask” in the future.
This is a particularly good strategy if you are a younger entrepreneur. Lenders can struggle with the risk of lending to a young entrepreneur sometimes, as many times they have not yet proven their mettle in the business world. If you can show that you can manage your finances in such a way that you can pay off a smaller loan, however, that can speak volumes as to the likelihood that you’ll be able to manage to pay off the larger loan, too.
You need to make a big purchase today
Seems logical, right? You need money you don’t have, so you take out a loan. This isn’t always a smart tack, but if you need something expensive in order to grow your business (computer equipment or a company vehicle, let’s say) it’s unlikely that you’ll have the cash on hand to pay for such a large purchase. In fact, most companies, particularly start-ups, take out loans to finance purchases like these. Just be sure that you are taking out a loan for something that is actually a need, rather than a want. Do you really need to upgrade your computer systems, or would it simply be nice? Does your office lunch room really need a cappuccino machine? Probably not.
To buy more inventory
If your products are flying off the shelves and you find yourself getting low on inventory, you may want to use a business loan as a way of financing the purchase of new inventory. Otherwise, you may be financially unable to purchase a large volume of inventory all at once, particularly when you haven’t yet started to turn a profit. This is often the case with seasonal businesses, in which inventory must be bought in off seasons to prepare for the busier times to come. Small-business loans can be an ideal way to get the inventory you need today, but be sure to compare the cost of the loan against the projected profit you’ll make from selling the inventory to determine whether it’s a good financial move or not.
A golden opportunity comes your way
When a good business opportunity comes your way, but you don’t have the capital on hand to jump on board, it may be a good idea to take out a loan so you don’t miss the gravy train. For example, what if you hear about a prime location opening up that would give your business more office space, a bigger warehouse, and/or more foot traffic? It would be a shame to pass that opportunity over simply because you don’t have the money to do it, right? If the return on the investment would be worth it, a loan can help you make the move.
You need to hire more people
When you first start out in the business world, you’re probably wearing lots of hats, doing the bulk of the work yourself. However, as your business grows and expands, you may find that you can’t handle everything on your own anymore, and you’ll want to hire some people to help. The trouble is, it costs money to have a staff. You’ll need to have office space and equipment for them, you’ll need to have computer equipment for them, and you’ll have to train and pay them! In the end, however, having extra people on hand to help you run your business can help you to earn more money in the long-run, so this could be a good business investment, too.
Regardless of your reason for considering applying for a business loan, it’s crucial that you weight the costs against the benefits. If the numbers indicate that the investment will result in increased productivity and profit, it’s probably a good investment. If it’s a matter of satisfying a need for immediate gratification with no promise of adding to your bottom line, a loan is not a good way to go. Save up for those extras instead.