If you run a business, no matter the size, there will be a time when you will need to seek financing. Cash flow issues are one of the main reasons new businesses fail, but unfortunately, they also have a hard time getting a loan in many cases. Sometimes, it’s because of their lack of history or poor performance, but in other cases, they get turned down because they weren’t prepared. There are also cases where debt is what ends up crippling a company. Let’s take a look at some questions all business owners should ask before seeking out a business loan.
Do I Actually Need it?
Most lenders will not lend money for superfluous things, especially if you’re a small business. Some things might seem essential to you, but not to them. You might think that you need new office furniture or just have to buy the latest piece of machinery, but none of this will thrill financiers if you can’t show that doing so will bring profits.
On the other hand, a lender is much more likely to give you money if you need to do things like buy inventory or increase advertising, for instance. So, reevaluate your reasons for taking a loan and expect anything that is luxury to be rejected.
What Kind of Loan Do I Need?
There are different types of loans that you can take, and a business loan might not always be the best for you. If your issue is with cash flow, for instance, you should take the time to learn the difference between business loans and working capital loans.
If you’re having trouble keeping the lights on because of some expenditure you made, a working capital loan might be a better option. But, if you want to expand your business, buy an important piece of machinery, or upgrade some of your assets, a business loan might be the best choice.
You also have other options like invoice factoring that could work. This is when you borrow money against your accounts receivable. The best thing about this is that the credit of your clients will determine if you’re eligible. This is another great option if you have cash flow problems. Or maybe you could benefit from the flexibility a line of credit would give you. These are all things you’ll need to assess before applying for a traditional loan.
How Much Can and Should I Borrow?
The next step is knowing how much you’re eligible for and how much you should actually take. Don’t get the max unless you need it and are 100% sure you’ll be able to repay it. You have to look at things such as what you need the funds for, annual gross sales, and the debt you already have.
A good idea here would be to redraft your business plan. This will give you a clearer picture of what your business needs and help you manage your money better. Financiers will also love seeing what your plans are for the money and how you intend to repay it in writing.
You must answer these three questions before you start the process of getting a loan. This will increase your chances of getting approved and could help you reevaluate your needs and expectations.