Should Your Small Business Borrow Money?
At one point or another, you may decide to expand or diversify your business operations. There are many ways to ‘branch out’, including utilizing your human resources more effectively, automating operations, using cloud-computing technology and specialized software, etc. Often, these changes require capital investment. If your business has limited cash flow and savings for reinvestment, you may be required to seek additional forms of financing to manage operations more efficiently.
Borrowing should always be undertaken with a cost-benefit analysis in mind. If the business loan, personal loan, or business credit line is being used to drive additional business, or improve your company’s standing, this can be quantified and qualified accordingly. It is imperative that careful financial management be adopted at all times to prevent ineffective use of resources that need to be paid back at a higher rate of interest.
Types of Credit Financing
There are many different types of business loans that you can consider for your company. These include SBA loans, term loans, equipment financing, short-term loans, invoice financing, business lines of credit, merchant cash advances, small business startup loans, personal business loans, and even business credit cards. Each of these avenues offers unique benefits, with attendant terms and conditions. An SBA loan offers government guarantees for long-term financing. It is provided by SBA lenders and typically features a maximum loan amount of $5 million with a minimum of $5,000.
Your repayment term ranges from 5 years to 25 years, and interest rates begin from 6.5%. These loans can be approved in 21 days. Since there are so many different types of loans available, it’s important that you’re actively checking your business options when it comes to credit financing. Term loans are another popular option available to business owners. With a term loan, you will receive a fixed amount of money up front which is then repaid over a period of time – 1-5 years. The interest rates are a little higher than SBA loans at 7% – 30%, and you can receive these lines within 2 days.
When is the Right Time to Borrow Money?
It’s tough to say when a business should borrow money, and when you should probably refrain from borrowing money. As a rule, you should avoid high interest credit lines at all costs. There are many affordable ways to borrow money, including the aforementioned options. Banks are increasingly difficult when it comes to approving business loans. They require mounds of paperwork, financial statements, possibly even guarantees to secure the loans.
With credit markets tightening up, and the cost of credit about to increase it is important to shop around for the best deals. When businesses borrow too much, they put unnecessary pressures on their operations. Interest-related expenses can add up to a pretty penny, and these costs have to be passed down the line onto consumers in the form of higher prices. If you don’t need to borrow money, don’t do it.
But once your business has reached a critical mass point, and you need to expand, or simply grease the wheels until a lucrative deal comes through, you may wish to consider business loans. Foremost in your line of questioning is the following: Can you afford to service the debt on a business loan? If you can, a business loan may be a viable option. You will need to consider your fixed and variable expenses, gross income and expected revenues. It may be beneficial to enlist the services of a financial services professional such as an accountant or auditor to determine your suitability for a business loan. The debt/service ratio is an important one for you to consider.
What Are Your Capital Requirements?
All businesses will go through periods where they need lines of credit to get them through a tough period. This is normal. If you are borrowing to expand your business operations, this is vastly different to borrowing for bridge financing. It may be necessary to run a test known as a return on investment analysis to determine whether an additional line of credit is best for your business. Banks and financial institutions want to know that you can pay back the loan and the interest on it. At all times, it’s imperative that your personal credit file be as healthy as possible. Since you are borrowing on behalf of your business, your credit score is paramount!