Most people are afraid of debt. But when you own a business, there will come a time when you will be in need of extra financing. You may have enough cash to spare for your brand. But as a business, it makes sense to build business credit. This will help you acquire more financial opportunities and even boost the value of your brand. But when is acquiring a loan for your small business a good idea and when is it best to skip this option?
When a Business Loan is Worth the Risk
Businesses can have different valid reasons to borrow cash. But before you do, it is best to take a hard look at your business finances. There is a need to consider all the fees as well the risks involved in case you fail to pay off your debt.
The following are some of the best reasons to get a loan for your brand.
To Expand Your Operations
Are your customers demanding more of your offers, but your current location can no longer meet the current high demands? Is the business able to make more profit for the last three years? If a business expansion is in order, then getting a loan to finance business expansion is worth it.
You may need more money to buy real estate so you can have a good place to accommodate your bigger operations. You can opt for a loan in a form of a mortgage to buy a new location. Make sure you only expand and buy real estate if you have excellent forecasting financials in the future and have a rising cash flow.
To Buy Inventory and New Equipment
When it comes to your company equipment, you have the option to rent or buy your own equipment. If you have a regular need for the said equipment, then it only makes sense to buy instead of renting it. To determine if buying a machine makes sense, consider running a cost-benefit analysis.
If you have a short-term need for financing inventories, then you can go for a short-term loan. This is a good choice if you have seasonal offers that sell. This way, you can acquire the inventories you need and simply pay the loan back after the season is over.
To Grab an Opportunity That Outweighs the Risk
Numerous opportunities will present themselves during the course of you running the brand. Once you come across an opportunity with promising returns, you will be forced to think about grabbing the chance or letting it slip. If you can generate enough money with the help of the said opportunity, then it is worth taking a loan.
Just make sure the returns outweigh the risks. Don’t let your enthusiasm and excitement cloud your judgment. Never underestimate the costs and base your decision on both your gut feeling and the actual hard numbers.
When It Is Best to Skip a Loan Application
If you have lots of reasons to borrow, there are also a couple of reasons not to push through with applying for a loan. These are as follows.
Borrowing to Pay Off Debts
Getting a loan to pay your other debts is a very risky decision. Debt refinancing and consolidation can help you finally repay your existing loans. But if it meant getting a loan with higher fees and longer terms, it can only lead to your brand’s downfall.
Before you even consider getting a loan, make sure you find out the reason why you incurred the debts in the first place. Determine the primary problem and what you can do to avoid this in the future. Don’t act on impulse or you will have a never-ending battle with debts.
Your Brand Margins Can’t Accommodate New Expenses
A business should be able to make enough revenue out of its existing margins. But if you currently have tiny margins, then chances are you won’t be able to pay off a new loan. The last thing you need is another cost you have to repay.
It is best to reconsider your business model and grow your profit first before taking other risks. Find ways to cut down costs. Work on increasing your profit margins first before considering another loan.
Pay Staffs During Off-Season
Simply relying on outside funds to pay your staff during slow periods is another way to acquire bad business debt. This will only increase your debt and make you reliant on debts in case of a cash shortage. Unless a loan can help you acquire the right talents so you can increase profits, then it is best to find other ways to pay your staff.
There are good reasons to take the plunge and bad reasons to get a loan. Before you make a choice, think multiple times while considering your finances, current business model, and your reasons for taking a loan. If there is no way you can make double the amount of profit out of the loan and you are not confident about repaying the debt, avoid another risk instead.