Why do businesses take out loans? The fact is that there can be any number of reasons. Some need financing to get the business off the ground. Others need a small influx of cash to make it through hard times. A loan could also help a business expand or move into a new location. And it’s the banks and lenders that set the limits to what a company can ask money for. With certain types of loans, businesses can do whatever they want with the money. So should you or should you not apply for a business loan? Ask yourself the following questions and you should get a good idea from the answers.
Question #1. Can You Get More Clients?
One of the top reasons for getting a loan is bad cash flow. And in a service-based industry, not having enough clients can spell bad news for cash flow. But the real question is… Can you get more clients? Additionally, is there something that you can change in your marketing strategy to get a boost in revenue? Bringing in new clients may be enough to fix your biggest financial issues, in which case there’s no reason for you to get a loan.
Question #2. Why Do You Need Extra Capital?
There should always be a solid reason for getting a loan. As such, what made you think about it in the first place? Is it for a long-term need or a short-term issue? Are you trying to move your offices or branch out into new territory? Small businesses may take out short-term loans for a variety of reasons. But in a service-based industry, there aren’t that many reasons to get a loan.
Odds are that your equipment costs little to nothing. Storage space problems often have their solutions in the virtual space. Even hiring more people may not be reason enough if outsourcing would work. You probably don’t even need a large R&D or product development budget, either. The point is that you may not want a loan unless it is critical to your company’s survival or growth.
Question #3. How’s Your Credit Profile?
For small businesses, it’s often the case that the owner’s personal credit profile may affect the business credit profile. And even if you could really use a loan, ask yourself if it can pay off. A bad credit score may put you in a tough spot with banks and even private investors. The interest rates available to you may put you in an even worse position further down the line.
It’s Not Always a Good Idea
For many companies, a business loan may seem like the best move to get out of a tight financial spot quickly. However, it also comes with long-term implications that you can’t predict if you don’t know why you have money problems right now. Ask the tough questions before seriously considering a loan. Perhaps there’s a simpler answer to whatever you’re facing.