When to Consider a Small Business Loan

Running a small business requires vision, determination, strategy, and, perhaps most importantly, capital. Whether you’re just starting out, looking to expand operations, or need extra funds to manage daily cash flow, the idea of using a business loan has likely crossed your mind.

Many entrepreneurs shy away from business loans because they’re unsure when and how to use financing effectively and to their advantage. For some, business loans are seen as a last resort – an option to help prop up your company during challenging times. However, when used with purpose and forethought, business loans can help you grow quickly, operate more efficiently, and seize opportunities confidently.

We’ll break down the benefits of pursuing a small business loan, explore scenarios where financing makes the most sense, and review a few things to keep in mind before you apply.

The Benefits of Small Business Loans

A small business loan is much more than a quick cash infusion for your company. It’s a strategic tool that can help you grow your business, achieve loftier goals, and make decisions with confidence. It can also provide additional benefits, such as the ability to:

Borrow Affordably 

Small business loans typically offer lower interest rates and more favorable terms compared to business credit cards. This perk allows you to keep more of your money invested in the business instead of spending it on excessively high interest payments. 

Boost Your Credit

Taking out a loan and managing it responsibly is an excellent way to build or strengthen credit for your business. Having solid credit can help you access bigger and better financing opportunities in the future as your company grows. Enhancing your business credit also enriches your credibility with investors and can grant more favorable terms from vendors – strengthening your professional partnerships. 

Extend Your Business Budget

Your cash flow may get tight at times, especially during periods of growth. Utilizing a small business loan can provide the breathing room you need to invest in your business effectively. This financial flexibility ensures you won’t have to risk your equity or exhaust your cash reserves.

When Might You Need a Small Business Loan?

All small businesses are unique, and that’s true regarding their financial needs as well. Some companies require significant startup funds, others need cash flow to meet growing demand for their products or services, and some are looking to expand their operations.

Business loans allow you to invest in opportunities that will enhance your company. A key component of borrowing is having access to affordable funds before these opportunities arise to avoid missing out. Here are a few scenarios when a small business loan is ideal:

Before a Significant Purchase 

Do you need to replace or upgrade equipment? Purchase a vehicle? Invest in new inventory? Borrowing extra funds will allow you to make necessary purchases without negatively affecting your operating capital. 

Before Expanding

Have you been dreaming of opening a second location? Building an add-on to your current space? Hiring more team members? Growing your business requires additional resources, and boosting your upfront capital can help you meet your goals faster without disrupting your day-to-day operations. 

Before a Transition

Are you adding new products or services? Introducing a new sales channel? Increasing your shipping availability? Transitions like these often require upfront investment. A loan can provide you with the funding you need to navigate these changes with confidence.

Considerations Before Applying for a Small Business Loan

It’s always important to thoroughly review all available information and weigh your options before proceeding with any major financial decision, and business loans are no exception.

Before you sign on the dotted line, keep these important details in mind:

Ensure Your Business is Strong & Stable 

Lenders will review the overall financial health of your business when determining whether to extend credit. They want to see proof that your business is stable or poised for growth. Be prepared to share documents such as profit and loss statements, tax returns, business plans, and any other requested information. The stronger your numbers, the better your odds of approval. 

Apply Before You Need Funding

A classic piece of advice regarding business loans is to apply before you need it. This may seem counterintuitive at first, but the guidance is sound. The best time to apply for a business loan is before money gets tight and you need immediate access to funds.

Lenders perceive higher need as higher risk. If you wait until your cash flow becomes strained, you may find it harder to find funding. Even if you do get approved, it may come with higher rates or stricter terms than you would have otherwise received. Don’t wait until you’re desperate for extra funds. Instead, be proactive and apply for a loan as soon as you realize you’ll need it. 

Understand What You’re Signing

Too often, small business owners seek online lenders that attempt to sell overnight funding and relaxed lending standards. They may or may not require supporting documentation, such as your business financial statements or strategic plans.

While quick, easy access to cash sounds wonderful, many business owners instantly regret their decisions when they realize the terms of the loan. These online lenders, even some of the most popular lenders you see on TV regularly, sack borrowers with interest rates over 30% APR! Dreams of growth or expansion quickly fade as you’re left struggling to devise a plan to repay the costly loans.

Create a Clear Plan for Using Your Small Business Loan

When you need to borrow for your business, it’s crucial to have a clear plan. Detail how you intend to use the funds, calculate the potential return on your investment, and create a repayment plan that aligns with your day-to-day operational budget.

How Will You Spend the Money?

Will the money go toward equipment upgrades? Payroll costs to bring on additional staff? Marketing and advertising to attract new customers? Outline how the borrowed funds will be used and split between your various needs. For example, you might spend 80% to purchase a commercial vehicle, and 20% will be invested into marketing initiatives. 

What is the Potential Return?

A business loan is an investment, and you want to ensure your decision to borrow leads to greater returns. Spend time estimating the potential benefits. Perhaps you’re opening a new location, purchasing a commercial vehicle to service more customers, or hiring additional staff. How will these actions impact your bottom line? How long will it take to realize these gains? 

Can You Handle the Payments?

Review your current financial reports and operational budgets. With the influx of new funds, how will that impact your business? Review all terms of the loan, including interest rates, length of the loan, potential fees, and any other specifics. Then, create a mock budget that includes the monthly loan payments.

Sometimes entrepreneurs become too excited about the potential upsides of their business investments. What happens is they borrow funds, spend them on new opportunities. But the return on those opportunities isn’t realized until months or even a year later. In the meantime, they struggle to keep up with the monthly payments on the loan since new money isn’t coming in yet.

Always spend wisely and ensure your business can handle the loan payments before you sign on the dotted line.

The purpose of a small business loan isn’t just about getting more money. It’s about investing in new opportunities and generating a financial return for your company. Whether you’re preparing to expand, investing in the future, or navigating an economic shift, finding the right financing can help you move forward. And remember, a loan shouldn’t be a panic button, but rather one part of your overall strategy for success.

If you want to learn more about our small business solutions or have questions about borrowing requirements, we’re ready to help. Please stop by any of our convenient branch locations or call 800-521-8440, ext. 1054 to speak with a team member today. We wish you the best of luck with all your business endeavors!

 

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