When you are considering business loan, make sure you “borrow with a purpose.” Your debt must help your business grow, not weigh it down.
While not every reason to go into debt is good, there are some good reasons to borrow. If you are ready to grow your business to the next level, here are five good reasons to consider applying for business loan.
To build credit for the future
If you foresee large-scale growth financing for your business in the next few years, begin with a smaller, short-term loan. The purpose of this smaller loan is to build or improve your business credit profile.
It’s often difficult for start-ups and less established businesses to qualify for large loans if both the business and the owners don’t have strong a credit history. Smaller loans with regular, on-time payments builds your business credit profile for future loans. This approach also helps you build important relationships with a specific lender. Reputable lenders, like Allied Financial, are valuable business allies and relationships you should nurture.
Use cautions, though, and never take on an early loan you can’t afford. Even one late payment on a smaller loan can make hurt you chances of qualifying for future funds.
To buy equipment
Few businesses exist that don’t need equipment. Equipment such as machinery, IT equipment, tools, and vehicles make your products or perform your services and are usually considered no-brainer investments.
Additionally, when financing equipment, the equipment can serve as collateral in an asset-based loan. Allied Financial lets you bundle assets with your accounts receivables when financing new equipment.
Before applying for a loan to fund equipment, make sure that the equipment you plan to purchase has a purpose and is not just a nice-to-have item. Your bottom line may suffer if you invest in equipment that does not have a return on the investment.
To purchase more inventory
Possibly the single largest expense for any business is inventory. While it’s necessary to keep up with demand by replenishing your inventory, it’s often difficult do; especially if you have a seasonal business. Ensuring you have inventory when you need it can be costly and it may take time to see an ROI.
Often, it’s necessary to purchase inventory during slow periods to have it on hand during busy seasons. This is when an inventory loan might be a good decision.
To measure whether this would be a wise financial move for your business, create a sales projection based on past years’ sales around that same time. Calculate the cost of the debt and compare that number to your total projected sales to determine whether taking an inventory loan is a wise financial move. Keep in mind that sales figures can vary widely from year to year, so be conservative and consider multiple years of sales figures in your projection.
To expand your physical location.
Have you found that you’ve outgrown your current location? Are you limited in hiring new employees because you simply don’t have the space for them to work? Will your new equipment not fit into your current space? Then that means your business is growing, and you are ready to expand.
Just because your business is ready for expansion doesn’t mean you have the cash on hand to make it happen. When this happens, a loan to finance a big move can be a smart investment.
Before committing to and securing funds for an expansion, measure the potential change in revenue that can come from expanding your space. Make certain you can you cover your loan costs and still make a profit. Use a revenue forecast along with your existing balance sheet to see how the move will impact your bottom line.
To invest in a business opportunity that outweighs the potential debt.
On occasion, an opportunity comes your way that seems too good to pass up. Perhaps you get an opportunity to order inventory in bulk at a discount, or you find a bargain on an expanded location. In such instances, determining the return on investment of the opportunity requires weighing the cost of the loan versus the revenue you stand to generate through the available opportunity.
The business opportunity must outweigh the potential debt. For instance, your business is awarded a commercial contract, but you don’t have all the equipment required to complete the job. If the equipment loan plus interest is significantly less than the business opportunity and you can show a clear profit, go for it.
But, be careful with your calculations. Over-enthusiasm has led more than one business owner to underestimate true costs or overestimate profits. When weighing the pros and cons, perform a revenue forecast to make sure you’re basing your decisions on hard numbers instead of gut instincts. Contact Allied Financial for a free consultation on financing your B2B business.