Going into debt is a decision that requires careful consideration.
In a way, a loan can fix almost any problem a business might have. But that doesn’t mean every reason is a good reason to get one.
The truth is that growth is expensive. Small businesses, in particular, can have a hard time managing growth. Property expenses, marketing costs, and wages all pile up, leaving little for expansion. Relying on a bulging bank account is not a sound business strategy.
If you’re having second thoughts about applying for a loan, this article may help. Below are four reasons why loan applications can make financial sense.
Any successful business will eventually have to expand its original location. For instance, you might need more cubicles for workers or more tables to seat patrons. It’s a good marker of growth, but you might not have the capital to expand.
Frequently, this will mean looking for a sensible finance option. In this scenario, a business loan is a generally good idea.
Jim Martin found himself in just such a situation:
Like many great companies, Jim’s motorcycle repair shop started out in his garage. His lifelong
passion for motorcycles proved to be a great driver for growth.
The garage became cramped very quickly. All indications were that the business would continue to grow, so Jim took the plunge.
A $35,000 loan enabled him to lease a new space and expand his inventory. The right timing
and loan amount allowed him to realise his vision.
Adding space to an existing location or moving to another one is a big expense. Besides the obvious upfront cost, you should take into account the added overhead. It’s important to do a thorough cash flow analysis, including projected earnings.
Every business relies on equipment in some way. And investing in equipment will directly impact performance.
Unless you get an unsecured loan, the equipment itself can act as collateral. That isn’t to say all equipment costs deserve a loan. For small equipment expenses, a low-interest credit card is often a better choice.
If you take out a loan for equipment, be careful about the loan terms. A very long term loan isn’t always a good choice. Ideally, the loan term should not exceed the expected lifespan of the equipment. Otherwise, you could get stuck with loan repayment for something obsolete.
Also, make sure it’s required equipment. Getting a new truck for the company may seem like a no-brainer. But if it will only replace an older truck, it’s probably not a good idea. Only consider debt financing for equipment that fulfils business purposes. On the whole, this means things that will have a clear impact on cash flow.
Day-to-day expenses are not usually considered when people think about loans. But cash flow is often a big problem for new and small businesses.
Bank loans can be hard to negotiate for these business purposes. Banks are very careful about loans and a broad capital injection can be hard to justify. Often it’s easier to work with a financial institution that’s motivated to lend.
That was the lesson Andrew learned when he saw an opportunity to accelerate growth.
Limelight magazine is one of the leading art publications in New Zealand. At one point, market
growth started to exceed its capacity.
Andrew decided to expand the staff and enhance its production process. But the financial
support wasn’t there.
After applying for loans with several banks, he learned his credit history was a problem. Using a
business loan specialist, he was able to get the capital he needed.
A fixed rate short-term loan is best in this situation. The goal should be to use the loan to smooth out temporary setbacks. Things such as late customer payments and money owed on tax returns are examples of this.
Alternatively, lines of credit could also serve this function well. A line of credit provides a lot of control over borrowing and can serve as a periodic capital injection.
This may sound counter-intuitive. But sometimes, it’s a good idea to take out a small loan just to get better interest rates on a larger one.
Some businesses have a pretty good idea of what their needs will be in the future. Growth is easy to predict in some industries. Or a big contract or opportunity might come into effect at a certain date.
In those cases, a business knows with some confidence that an expansion will be in order. That expansion may require a sizeable loan. However, a poor credit history could have a significant impact on the terms of that loan. A small loan could be a good way to improve credit scores and make sure the big loan is more favourable.
You could justify an equipment loan, including the upgrade of old equipment.
An easy-to-repay small loan could prevent future problems. Even if there isn’t a reliable milestone coming up. Sooner or later, a good credit history will be a valuable asset.
Now and then, business opportunities will come knocking. When they do, don’t let floundering cash flows be the reason you miss out on them.
Be smart about loans, but don’t be dismissive. Take the time to analyse the potential value of going into debt. If you can make more money by acting quickly, a loan is completely justified.
Don’t stay stuck in a garage, or working on outdated equipment. All these things hurt your bottom line much more than a loan would. Be smart and consider loans carefully.
We can help you find the loans that work for you. Head to our website to find out more about what we have to offer. If you’re ready to apply, use our online form to lodge your application in less than five minutes.
