When you run into a problem as a small business owner, your first thought may be to throw money at it. However, not all issues need to be solved in this manner, and so before you take out a business loan, there are a few questions you should ask yourself.
This way, you will be going into the process with eyes wide open and borrowing for all the right reasons. Borrowing for the wrong reasons can put extra stress on your plate and possibly put the business in jeopardy.
Do You Have a Good Credit Score?
Before you can consider taking out a business loan, you will need to be aware of both your personal and your business credit score. If you know that it is less than stellar, there are a few things you can do to improve it, including establishing trade credit with your vendors.
You’ll want to ensure you have a score of 700 or above, as this is the standard that banks and credit unions will expect to see. You may get away with 650 with the Small Business Administration, and you can probably find alternative online lenders that will accept a lower score as long as you can prove a healthy cash flow.
Do You Need to Borrow Extra Capital?
As this article from AdvancePoint Capital outlines, you should always look at the reasons why you are applying for a loan. You should have a specific purpose for the extra capital you wish to acquire, and this will determine how much you need to borrow and whether borrowing is worth it.
It will also help you to choose the right lender and the right terms. If you are unable to outline exactly how you will use the cash, it probably isn’t the right time to take out a loan.
Will You be Able to Keep Up with the Repayments?
Once you have determined the purpose of the loan and whether or not you have a good enough credit score, the next thing to look at is whether or not you can realistically keep up with the repayments. Depending on which lender you have decided to go with, there will be a payment plan that you need to stick to.
Nowadays, many lenders offer variable terms, including monthly repayments or even daily and weekly. How you manage your cash flow will indicate your ability to stick to the schedule e.g., if you choose daily or weekly repayments, but most of your cash flow occurs at the end of each month, this is probably not the right choice for you.
Will Taking Out a Loan Positively Impact Your Bottom Line?
Ultimately, you will need to ask yourself whether or not taking out a loan will positively impact your bottom line. If you know you are in a good enough position to be accepted by a lender, and you have worked out that you can afford the repayments, the next step that you cannot neglect to factor in is whether or not it will help you to generate a return on your investment or increase the value of your business. If the answer is yes, it probably is the right time to borrow more capital.
Before applying for a business loan, make sure you ask yourself the most important questions first.
Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.