Businesses of all sizes need capital to grow. Thus, if you’re a business owner, there will likely come a time when you need to take out a loan.
Be sure to ask yourself certain key questions before you do. Not all loans are the same. To find the right one for your goals, ask yourself:
What am I using the loan for?
This may seem obvious, but it’s an easy detail to overlook if you’re so focused on growing your business that you pursue a loan without truly stopping to consider what you’re going to be using the funds for.
Taking the time to plan how you’re going to use a small business loan is key for several reasons. First of all, some business loans carry use restrictions. You could waste time applying for a loan you won’t qualify for if you don’t know how you plan on using it. Additionally, by accepting a loan, you’re essentially making a bet. Specifically, you’re betting that taking out this loan will lead to profits in the future. It’s much easier to be confident in your bet if you identify clear, revenue-generating ways to apply the loan to your business.
When do I need the funds?
The amount of time it takes to receive funds from a business loan can vary on a case-by-case basis. You need to determine how soon you need the capital while researching the approval timeline of different types of loans. For instance, maybe you received a new contract from a client. In order to fulfill the new contract, you may need additional resources, employees, or any other investment that will cost more than you can afford right now.
In a situation such as this, you can’t wait around to receive your capital. The client may decide to work with someone else if your lack of funds will prevent you from meeting their deadline. In this case, you may be better off using a lender that specializes in fast approval and a quick release of the funds. It might cost a little more than borrowing from a bank, but it is worth it if your business needs to fulfill an order already set in motion.
This is another reason it’s important to clearly define why you’re applying for a loan in the first place. Knowing how you plan on using the capital will help you better determine how soon you need it.
Can I afford the interest rates?
Don’t make the mistake of accepting a loan without honestly asking yourself if you can afford it. While you may want to be optimistic, assuming the returns the loan generates will more than cover what you have to pay in interest, it’s much smarter to be realistic.
According to Funding Circle, a peer-to-peer lending marketplace, you also need to thoroughly research how much time you’ll have to pay back the loan, what the schedule for making payments is, and how much you’ll have to pay with each installment. Taking the time to calculate these costs (and honestly answering whether they’re in your budget) will save you from major financial difficulties in the future.
None of this is to discourage you from pursuing a business loan. On the contrary, these questions will help you make the right choices when seeking capital. That’s key to growing your business responsibly.
Guest post courtesy of Luke Hayward