What comes into mind when you think of debt?
Many small business owners are debt-averse, which means they’re hesitant to borrow money because they’re unsure if they can afford repayments. But as an entrepreneur, it’s important to realize that you need money to make money. In some cases, running a debt-free business may hinder the growth and success of a company or even its ability to operate and stay afloat.
Small business financing, such as unsecured working capital loans or business term loans, is definitely something to consider if you’re short on funds or you’re presented with new opportunities or investments that could take your business to the next level.
Other than that, here are three ways a small business loan can help your company:
1. There’s a business opportunity that outweighs the total cost of the loan.
When running a business, sometimes, you’re presented with opportunities that are too good to pass up. For instance, you’re offered a steep discount for bulk orders, or you’ve found the perfect location for your shop. It’s important to determine your return on investment of the opportunity presented to you. Weigh the cost of the loan versus the revenue you potentially receive through the said opportunity.
Let’s say your business received a commercial contract worth $50,000. The problem is you don’t have enough manpower and equipment to complete the project. Hiring, training, and equipment purchases would amount to $12,000. If you took out a loan and pay a total of $3,000 in interest, you’d still have $35,000 in profits.
However, be careful with your calculations. Many small business owners are guilty of underestimating the expenses and overestimating the profits. Before you weigh the pros and cons, create a revenue forecast to ensure that your decisions are based on hard numbers rather than estimates.
2. You want to expand your current space.
When your business has grown and your current space is becoming crowded, it may be time to move to a bigger office space. This is excellent news since it likely means that your business is doing great and you’re ready to expand. However, just because your business is ready for an expansion doesn’t mean you have enough working capital to do so.
The upfront costs of an expansion and additional overhead will be sizable. As a result, you may need to take out a small business loan to finance your business growth. But before you commit to a loan, make sure to estimate the potential change in revenue that comes from the expansion. Make a forecast using your existing balance sheet to see how moving to a bigger space impacts your bottom line. Would you have enough cash to make repayments on time and still make a profit?
And if you’re planning to open another location or branch of your retail shop, make sure to research the area and assess whether it’s accessible to your target customers.
3. You need to buy more inventory.
Inventory is one of the major purchases for any product-based business. You need to keep up with customer demand by restocking on inventory and providing your customers with several high-quality options.
Inventory purchases are expensive, which may be a challenge for businesses that need to purchase large quantities of inventory before seeing a significant return on their investment. This is especially true for seasonal businesses. There will be times when you need to buy a large amount of inventory without the working capital.
A small business loan is a great solution to address this problem. You can use the funds from the loan to purchase inventory to prepare for tourist seasons or holiday seasons. However, it’s important to measure if taking out a loan would be a wise financial decision for your business. Create a sales projection based on your previous sales around that same time. Calculate the cost of the loan and compare that to the total projected sales to figure out whether taking out a loan to purchase inventory is a wise move. Sales figures may vary widely, so be sure to consider several years of sales figures in your financial projection.
Now that you know how a small business loan can benefit your business, you now have an idea of whether you need to apply for a loan or not. If you decide to secure financing, do your research and assess your business to know which loan product is best for your business.