Contrary to common belief, a business loan isn’t a get-out-of-jail-free card for whenever you’re met with financial troubles. It also comes with its own issues, so while it may solve your problems temporarily, new ones may arise as a result. Furthermore, if you’re unable to pay the loan promptly, it may hurt your credit, making it harder to get loans later on.
Put simply, a business loan is only ever worth getting under certain circumstances. What are those circumstances and when is the best time to get a business loan? Read on to find out.
- You Want To Open A Second Location
Business owners will have different thoughts as to what makes a situation a good time to get a business loan. But the general rule of thumb is that it must meet these two conditions:
- It poses a problem that only a loan can solve, or at least it’s the most logical solution
- It leads to a business opportunity that can help pay off the loan
Business expansion meets these two conditions. For one, it requires you to get your hands on a lot of money at once. Secondly, a second location typically increases your revenue as you’re able to tap into the new location’s market. It also allows you to effectively expand your business space if your current one is no longer large enough to accommodate your existing customers.
Though there are different types of loans for small businesses, some of them can cover your expenditure for business expansion. A loan can offer up to USD$2 million worth of funds.
However, it’s important to keep in mind that not just any business, especially a small business, can take out a massive loan. It often requires good credit, which leads to the next “best time”.
- You Need To Build Credit
Your credit score is a contributing factor to all kinds of financial transactions, whether it be personal or business. For starters, it affects your chances of getting a loan. But more than that, it also contributes to how big of a loan you can get and its interest rates. That being said, below is a breakdown of how high of a credit score you need for specific types of loans:
- 550 or below: With this credit score, no bank will give you a loan, and most lenders will turn you down. If you do manage to get a loan, chances are it’ll have a high interest rate.
- 550 to 600: You should be able to get a loan from invoice financing companies fairly easily, though you need to provide invoices, and the interest rates are also still high.
- 600 or 650: At this point, you should be eligible for equipment financing and other medium-term financing companies. But you must already be an established business.
- 650 to 700: A credit score of over 650 will make you eligible for most bank loans which typically have low-interest rates. However, invoice financing companies are still the best choice if you’re at the lower end of this spectrum and your business is only starting.
- 700 or above: With a credit score of 700 or above, pretty much any financing option would be accessible. These include lines of credit from banks, a regular bank loan, or even a loan from the Small Business Administration (SBA), which often have low rates.
If your credit score is somewhere around 650 to 700, then you most likely wouldn’t be able to take out a loan to cover your expenditures for a business expansion. So, if you’re planning on doing that soon, you can start building credit with small loans now. But that also means if you have no plans to expand your business, then this won’t be a viable reason to get a loan.
Nevertheless, if you do decide to go this route, make sure you make the monthly payments on time. A single late payment can ruin your chances of getting a line of credit in the future.
- You Plan To Buy Equipment
Though many businesses nowadays rely on the internet for many things, some industries still use numerous tools and equipment. A coffeehouse, for example, needs tables, chairs, and all kinds of coffee makers. While you might already have these things, it doesn’t take a second location to need a new set of equipment. That’s especially the case if your business is popping off.
Hence, this situation poses a problem that a loan can solve. In addition, it leads to a business opportunity that can drastically increase your revenue, thereby helping you pay off the loan.
Another reason why needing new equipment is one of the best times to get a business loan is because it often leads to a more seamless transaction. That’s because it’s easier to get than regular loans since you can put up the equipment that you’ll buy using the money as collateral.
- It’s Your Business’ Busy Season
When your business gets busy, and there’s an influx of customers, there’s a good chance you’ll run out of inventory quite frequently. Naturally, you wouldn’t want to decline their patronage, so it’s important to always have a surplus during these times. However, that doesn’t necessarily mean you can get it easily, especially if the weeks or months before that were relatively slow.
You likely have no funds for surplus, and that’s why it’s an excellent time to get a business loan. It’s necessary, and it leads to increased revenue which you can then use to pay off your loan. Furthermore, during the busy seasons, you’ll most likely need more hands on deck and you’ll need to hire a couple more workers. Again, that’d require you to have money to spare.
A business’ busy season would, of course, differ from one another, though for most businesses, it’s around the holiday season.
Closing Thoughts
Many people make the mistake of taking out a business loan so they can pay for a different, older debt. Unfortunately, that can lead to more problems in the long run. That’s why it’s important to know whether taking a loan is a good idea or not, and with this guide, you have that pretty much covered. But remember, a loan only solves your financial issues. Even with the necessary funding, you still need to put in extra hours if you want to ensure your endeavors are a success.
