The first question may appear obvious: what small business couldn’t benefit from an injection of cash to help it power ahead?
However, taking out business loans aren’t always the right decision, and there are several factors to bear in mind.
What you need to consider before going ahead
Are you ready for a business loan?
If your company doesn’t have the cash flow to repay a loan, then the answer is no – however much you would like to invest in new people, new equipment or a new marketing campaign.
Of course, these investments should repay dividends, but you have to know you’re capable of making repayments if things don’t go to plan and new customers don’t beat a path to your door.
Is your credit score good enough?
Many small business owners have little or no idea of their business credit score, which will significantly affect the range of loans they are offered – not to mention the interest rates.
If you’re keen to borrow but have the kind of credit score that will make the computer say no (or at least charge you through the roof), then you’d do better to pay down your existing borrowing (particularly your credit cards, though you should leave the accounts open) to repair your credit score before seeking that big business-critical loan.
Do you know exactly what’s on offer?
When seeking business finance, some businesses go straight to their bank and gratefully take whatever is on offer. Bad move. It’s certainly possible that your bank, which has a record of managing your money, will offer you the best deal.
However, banks have significantly tightened their lending criteria since 2008, so there’s every chance they will say no even if you have a long-standing relationship. You may also find that alternative lenders or peer-to-peer lenders can offer you better terms and conditions on business loans, as well as being more flexible, so it usually pays dividends to investigate the market in depth.
The benefits of borrowing for your business
Having considered some of the potential pitfalls, let’s consider what the right business loan can do for your company.
First of all, it can improve your cash flow. For certain, your monthly outgoings will rise with loan repayments, but you can keep a cushion of cash on hand in case there’s a sudden downturn.
Alternatively, with invoice factoring and discounting, you can tame a troublesome cash flow forever – these innovative solutions allow you to borrow the vast bulk of your invoices the instant you issue them, with repayment being made when your customers pay you.
Secondly, you can power business growth. The right marketing campaign could initiate a step change in your business, and hiring the right people or purchasing state-of-the-art equipment could sharpen your service offering sufficiently to take things to the next level.
Thirdly, you can restructure your debts. If you have a stubborn credit card debt attracting interest well into double figures, or a residual bank loan taken out when your business was young and considered a poor risk, you may be able to pay off your debts with a new business loan at a lower interest rate.
Alternatively, if your company is struggling to meet its repayments, you can refinance over a longer term – chances are you’ll pay more in the long run, but crucially you’re more likely to stay in business.
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