Bankruptcy and Business

Should one apply for a small business loan to grow his/her business? It is true just because you can think of a reason to borrow for your business does not mean you have a good reason. What are some justifying reasons?

One good reason for borrowing money to grow a business is your business is growing and needs more space. Maybe your plant has outgrown your office space or you need more space to handle inventory, personnel, and/or assets. Depending upon your situation, you probably cannot just snap your fingers and come up with more room.

However, just because your business is ready to expand does not mean that you have the cash to do so. Financing a loan can get you the cash you need when you need it. There are questions you need to ask before getting a loan, such as whether you could cover loan costs and make a profit. You need to “crunch some numbers” to know how this loan would affect your bottom line.

Another good reason to borrow money for business growth is to build credit for your business future. It is sometimes harder for new/young businesses to qualify for loans because they do not have a verifiable credit history. However, getting smaller loans and making payments on time will establish and build your business’s credit standing for the future.

Building your credit like this can also help build relationships with lenders, which will give you connections for when you need that larger loan. Be cautious about this loan because one late payment on this smaller loan can damage your chances of getting a bigger loan someday.

A third good reason to borrow money for business growth is that you need additional equipment to run your business. This can mean new technology or replacing old, worn out equipment. If you get a loan for equipment financing, you can sometimes set up the loan so the equipment can serve as collateral, like a car loan.

One thing to remember when you are taking out a loan for equipment is that actual needs and wants should be separated. Employees probably want a margarita machine, but since you probably are not running a restaurant, it might not be the best use of your business resources.

A fourth reason to borrow money for business growth is that you want to purchase more product/inventory. This can especially be true if your business is seasonal or there are other cash flow problems. To know whether this borrowing would be good for your business, make some sales projections based on your sales history for that time of year.

Comparing your projected sales to the cost of the proposed debt will help you determine whether a loan is a wise financial move. Lenders like OnDeck provide amazing rates. When making this prediction, you need to keep in mind that sales can fluctuate wildly from year to year. You do not want to borrow an amount that will not cover your projected sales and expenses, and you also do not want to borrow too much.