When is a Small Business Loan a Good Idea?
While WomensBusinessLoans.org is here to help small businesses quickly and affordably gain access to capital, it is also important for businesses owners to understand when borrowing money for your business is a good idea.
Whether your firm is two years old or twenty -- undoubtedly, at some point you will consider the need for a business loan. For example, you may have a project you need to complete, a piece of equipment that will help you compete or simply need additional marketing activities to help grow your customer base.
Here are a few situations where borrowing money might be good for your business:
(1) Replace High-Interest Rate Loan and/or Revolving Financing
Often, businesses end up using credit cards to get through cash flow crunches or to make a quick purchase of equipment or supplies. Over time, the high fees of credit card debt can become quite costly. Borrowing money at lower interest rates with a fixed term can result in significant financial savings, improved cash flows and improved credit scores.
(2) Fund a Contract and/or Used for Working Capital
Businesses are frequently faced with periods of growth and new opportunities. When this happens, sometimes inflowing revenues do not keep up with up-front expenses. This can be an appropriate time to borrow money for working capital. When borrowing for working capital, firms should always have created and considered cash flow projections (when money comes in vs. flows out and the resulting positive or negative available cash). Here is a spreadsheet provided by SCORE for firms who need to create cash flow projections.
(3) Purchase an Asset
For many businesses, purchasing an asset can help the firm to provide new services, produce more products, shorten production times, add equipment needed for new staff and even improve your financial strength for future loans. Assets can create a long term return on investment. In some cases, leasing an asset may be preferred to purchasing. However, often owners determine an asset purchase to be a good investment.
(4) Make an Acquisition (or Acquire Equity)
Some businesses grow through acquisition of a competitor. Acquisitions frequently involve securing a loan and leveraging the increased revenues from the acquisition to fund loan repayment. Acquisitions can add customers and assets while also reducing competition and the cost of competing.
Sometimes businesses that are founded by multiple people find that one or more of the owners decide to leave the business. When this happens, the remaining owner(s) may need capital to buy out the departing owner's share(s) of the company.