There’s an old saying which says that it takes money to make money, and in practice, this is practically universally true. That doesn’t mean we all always have that money on hand and ready to go when an opportunity presents itself. In the business world, that’s when seeking out a creditor and securing a small business loan is the way to go. You’ll get a quick injection of cash now, and then slowly pay it off over time plus interest. A well-timed loan can skyrocket a business into the kind of success where you’ll never need a loan again, while a poorly-timed loan can sink your business entirely.
If you’re about to pull the trigger on getting a loan for your business, make sure you answer these questions first:
Is there a plan for the money?
There should be a very firm plan as to why you’re taking out this loan, hopefully with every dollar accounted for. Taking out a loan for abstract ideas like “marketing” or “expansion” can sound appealing. But then, if there’s no concrete plan in place, there’s a huge risk the money will be gone quickly with little benefit gleaned. Ensure you know what’s going to be bought, and why it’s going to increase your earning potential.
How’s your credit?
How much money a creditor is willing to lend you, how long you’ll have to pay it back, and what interest rate you’ll be offered is directly tied to your credit score. The barriers for entry are lower now that there are services that deal exclusively with loans. Getting an easy loan from Dealstruck, for instance, has less red tape than a bank. Nonetheless, all creditors will look at your credit score. Both your personal credit score and your business credit score matter here. It might not be worth the added interest payments if you haven’t built up a decent credit score, so always keep that in mind.
How much money do you need?
If you have a concrete plan as to what you’d like to do with the money, the next step, of course, is to see how much you can secure. Secure too little, and you risk not attaining the benefits desired. Secure too much, and you might end up with your hands tied if you need another loan in the near future. Finding the perfect amount involves seriously and soberly appraising the costs for each individual aspect you’ll be investing in, but often, that’s not enough. You should also add anywhere from an extra 2%-10% to cover unexpected events like a contractor needing additional funds, or things simply being more expensive than you had calculated.
As obvious as these questions might seem, you’d be surprised how many people walk out of a bank with a small business loan they absolutely don’t need. It might seem comforting to have a sudden influx of cash. However, the reality is that it isn’t really yours, and your creditor is going to want it back. Loans that serve little purpose or whose risk outweighs its potential for growth are disastrous, as are loans that are far beyond what’s necessary. Think smart, and plan carefully before you take out that loan. Using an online interest calculator is a great way to figure out if you’re willing to put up with the added fees associated with the sum you plan to acquire.