7 Scenarios When It Makes Sense To Take Business Loan
When you consider taking loan for starting your business or for growing it, you will be greeted with all kinds of opinion from people. There will be the traditional pessimist bunch talking all the cautionary anecdotes into your mind, and there will be others for whom business loan proved to be a blessing. However, the feasibility of a debt for your business depends on a number of factors including the stage of business, purpose of the loan, credit history of the business, business loan interest rate, etc.
Let us talk about a few scenarios when it makes complete sense to take on business debt-
WHEN YOU NEED TO REPLENISH YOUR INVENTORY
The biggest expense for any business is the inventory. And if the business is a seasonal one, you will be required to purchase a huge amount of inventory in bulk before the sale starts. Without enough cash in hand or a bank, it will be extremely difficult for a business to replenish the inventory. This is where a business loan comes into play. You can take inventory loan to purchase inventories in bulk. To decide whether this is a wise step, you should compare the sales projections of the last few years during the given season. Compare the cost of the business loan with the sales projections to find out if it makes sense to take loan for replenishing inventory. Since market situations are volatile, you should be a little conservative when looking at future sales projections.
WHEN YOU NEED TO PURCHASE EQUIPMENT
All businesses need certain equipment- it may be machinery, IT tools or anything else that makes operations easier for the business and adds to its efficiency. Financing your equipment through loan makes the most sense as the purchased equipment can serve as collateral, thus giving you a lower rate of interest. Before taking up a loan, you should understand whether the equipment itself is a worthy investment. If yes, you must finance the same with a business loan.
WHEN YOU NEED TO EXPAND YOUR OFFICE
If you feel that your workforce is outgrowing the space in your current office, it sounds like the right time to expand your office or move to a bigger space altogether. Expanding means new real estate lease, cost of picking up and moving and the change in overhead expenses. While there is urgent need to move, there may not be immediate cash available at hand to take this step. Business loan can help you with the financial aspects of this big move. But before that you should measure the potential changes in revenue due to relocation, especially if you are a retailer.
WHEN YOUR BUSINESS NEEDS FRESH TALENT
A small business starts with a few people who wear many hats at work. But as the business grows, it becomes difficult for a few people to manage everything. Records show that some start-ups have also taken up debt for hiring new talent in order to keep their business innovative and highly competitive. You should take business loan for hiring fresh talent only if you are sure that the revenue generated afterwards will be able to cover the cost of the debt. The impact of fresh talent may not be visible immediately but you should do future projections as to how it helps you paint the bigger picture.
WHEN YOU WANT TO GRAB A GREAT OPPORTUNITY
Sometimes, opportunities just knock your door and you do not want to let go of it. Businesses come across such opportunities every now and then. If you think an opportunity is able to outweigh the burden of a debt, it makes complete sense to borrow some amount from the bank to fulfil it. For example, you are getting real estate in a bustling area at a surprisingly low rate and it will be wonderful for opening a new store or for expanding your business. Now you should compare the profit you would make from this new venture with the cost of your debt and if the former outweighs the latter, you should grab the opportunity by taking on a debt.
WHEN YOU WANT TO BUILD YOUR CREDIT SCORE
Credit scores are extremely important, not only for individuals but also for businesses. Whether big or small, businesses will need to borrow from the bank at some point of time. It may be for business expansion, growth or just to make for the operational cost. To get business loan at competitive rates of interest, businesses also need to show a good credit score. And a credit profile can be built only when you have taken previous debt. Taking small business loan will be easy to pay off and at the same time it will build a credit history based on which you can take bigger loans in the future. This tactic will also be helpful in building your relationship with a particular lender (bank or financial institution). However, you must be careful about your repayment capacity and borrow only an amount that can be easily repaid by you.
WHEN YOU WANT TO ENHANCE YOUR MARKETING
How will your business make profit if the people have not heard of it? Marketing your business in a competitive environment is one of the most important parts of entrepreneurship as it helps you reach more people. It doesn’t always have to be expensive but for a small business it will add to the operational cost and may not be manageable. Nowadays, both offline and online marketing are important, adding more to the cost. You can take business loan for some extra cash. The debt can be paid off with the help of extra revenue generation from influx of new customers.
The seven scenarios given above may call for business loan help. Apart from these, if your business has reached a stage of stabilization, you may also take the business loan route to meet operational costs in the events of sudden cash crunch.
You should only take a loan if you are sure about repaying it easily. Being an entrepreneur, you must be acquainted with the fact that everything new brings some risk with it. It is your call to see whether risk is worth taking. Ask yourself whether taking a loan will improve your bottom line or not. If yes, you should go for it. Assess your financial situation and then take the step.
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