There are great reasons to take out a business loan and situations in which this should not be considered. At the end of the day, you go into debt so you have to be very careful. Nowadays, it is very easy to take out a loan, even with bad credit thanks to services like LetMeBank.
However, there are always situations that are better, when loans are a very good idea. Examples of such situations are presented below.
1. Expanding Physical Location.
Outgrowing the initial office location is a great time to expand. Maybe you now run a retail store and you have too many customers. In all such cases, business booms and you can expand. However, this might not be possible due to a lack of finances.
When faced with such a situation, a business loan might be a very good idea. It helps you to cover all the upfront costs associated with expansion. Just make sure that you can deal with the extra expense associated with paying the loan back and that the new physical location was carefully chosen.
2. Building Future Credit.
When you want to apply for a larger financing option in the future, usually in a number of years, you can start with the smaller loans so that business credit can be built. A young business so often has a very hard time when it comes to qualifying for the larger loans. This is especially the case when both the owners and the business lack strong credit history.
When you take out a smaller loan you build a relationship with a lender. In the future, you will be able to qualify for the larger loans. Just be extra careful because even a single late payment can lead to hurting your chances of receiving that larger loan in the future.
3. Equipment Needed For The Business.
Business offering can be improved when you buy equipment. This is actually one of the most common reasons why companies ask for loans. They need IT equipment, machinery or other tools so that service can be performed. In addition, the equipment that you buy with the loan can be used as collateral in the future, just as with the car loan.
Before this loan is taken out though, separate business needs from things that would be nice to have. For instance, the employee might love a new margarita machine but this might not be needed for your business to perform actual operations.
4. Inventory Purchases.
Inventory is a huge expense for a business. Just like equipment purchases, you have to keep up with demand by actually replenishing inventory with high-quality and plentiful options. At times, this is really difficult because you need a large inventory before you get your investment back. That is especially the case for the seasonal businesses.
You need to create an accurate sales projection to see if this loan would be a smart financial move. Sales projections have to be created based on sales from previous years. Also, you have to calculate debt cost to compare with projected sales. Remember that sales figures will vary from one year to the next. You should be conservative and use as much data as possible when the projections are created.
The four examples mentioned above are great situations when a business loan would be a great idea. However, many others exist and you have to take them into account. Always calculate whether or not the extra money you get is worth it for the business. If not, you need to consider other ways to raise capital. Never take out a loan when you are not 100% sure that it is a smart business decision.