Taking out a business loan is an important decision. Regardless of your chosen lender, type of loan, and the purposes of your request, the process can go smoothly, or it can present obstacles. But, for a small business to grow and survive in a highly competitive market, these financing options are often necessary, and it is critical to the future success of your business that you take the time to educate yourself on business loans and financing so that you can make the right decision.
Ways to Know the Right Time to Apply for a Small Business Loan
Here are some potential scenarios. If your company finds itself in one of them, it means the time has come for you to apply for a business loan.
1. Dealing with Emergencies
When having a business, emergencies and unpredictable issues are bound to happen once in a while. During times of emergency, applying for a business loan is the obvious strategy. When something isn’t right, you need to solve it quickly because it might affect your entire company. Vehicles can break down, pipes might burst, machinery could stop working, and critical inventory might fall from the distribution van.
All the aforementioned scenarios need quick funding that you can immediately use to fix them. Short-term business loans are an excellent and useful solution, although they can be a tad expensive. A potential alternative is an SBA loan, which comes with lower interest rates.
2. Increasing Working Capital
Being low on working capital is another potential issue that requires you to get a business loan. When all the other problems are out of the question, this one is also a viable reason to ask for some extra funds. Working capital refers to your company’s daily cash consumption that is used for operations, and it isn’t linked to losses or profits.
One example that most people know about is payroll. Working capital is a highly fluid asset that can become easily available while also covering all kinds of possible situations.
3. Purchasing New Equipment
Damaged or outdated equipment needs to be replaced to ensure the proper functioning of your business’ activity. To do so, you may have to get a business loan to sustain your purchases if you don’t want to miss out on gaining potential revenue. This type of situation isn’t exactly an emergency, but it is an important problem that needs fixing.
If you want to maximize your revenue, you need to optimize your business first but, sometimes, accomplishing that requires you to make money from the company’s operational funds. Instead, what you could do is get a business loan. It may sound risky at first, but you can transform it into a clever decision by making sure that the money you receive will multiply.
4. Expanding Your Company
At some point, you will want to launch new locations, acquire new talent, enlarge the offices, export your products, or initiate a massive marketing campaign. All these actions translate into a business expansion that requires investing plenty of time, money, and other resources.
It is a very good idea to take a loan that will help you to diversify or upgrade your business’ operations. By taking a loan, you will avoid spending money from personal funds or working capital. You will be ok, and this decision is a fruitful one as long as the results outweigh your loan’s payoff.
Many banks and lenders offer great deals that target small businesses. They focus on lower interest rates and long-term loans. Providers won’t consider you as a risky venture as long as you show them that your company is successful, and it has an ascendant growth trend.
5. Building Business Credit
The process of building business credit is excruciating for small companies. Most entrepreneurs avoid using personal credit scores as a method to secure their business credit. Until the company creates a solid payment history, you will probably have to resort to your personal credit.
After building a steady company credit history, lenders and suppliers will begin to reference your firm’s credit score. One of the most effective ways to achieve that is by taking a business loan while also making sure to pay it on time. Start with smaller sums, and, in time, you can reach larger trade contracts.
Applying for a Business Financing Program – Thins to Consider
There are several essential things you should keep in mind before applying for a business loan:
- Establish the loan’s purpose – the provider will want to know what you will use the money for and if the loan will generate profit for your business. Business loans work better when they’re invested in short-term cash needs such as launching a new product, buying heavy machinery, etc.;
- Know your numbers – you must assess your company’s financial status and review your monthly key metrics. How did your profit or loss fluctuate over the last few years? Gather documents like cash-flow statements and balance sheet that will help you create a more predictable forecast;
- Determine the way you will pay off the debt – will you be able to pay off the loan until the agreed period ends? Many banks offer single-digit interest rates, but they aren’t willing to take significant risks. They will require your cash flow statement while considering a potential worst-case scenario;
- Show your collateral – the lenders want to lower risks as much as possible, so they ask for collaterals. In this situation, you should show them your company loan repayments history, if any, to make their decision easier.
How Can You Qualify to Get a Business Loan?
Here are the essential steps you must take if you want to qualify for a business loan:
- Build strong credit scores;
- Research the provider’s requirements and qualifications;
- Gather all the necessary documents, both legal and financial;
- Revise your current business plan and improve it;
- Provide solid collateral.
Conclusion
Before applying for a small business loan, you must always investigate the investment landscape as there are better and worse times to take out financing. Next, you should clearly define your business goals before deciding which type of business loan or financing is right for your company.
