The majority, if not all small companies reach a point at which an unsecured small business loan might be required. It may be to fill an area of damage due to rising costs or other unplanned expenses. It is also a possibility in cases where a company isn’t yet producing enough organic operating capital needed to boost growth and propel the business to the next stage. Without the capacity to complete the next contract, or to properly market future business opportunities growth, progress could become difficult.
The business owner must make a wise choice when it comes to their business. If a business’s owner chooses to take the first small-sized business loan they can find according to the conditions of that loan may be a burden on the vessel down, instead of giving the business the wind sails require to propel it forward.
However, how much loan does a business actually require? What are the key factors to take into consideration when selecting a small-business loan? If the business owner doesn’t know the potential impact the small business loan might have, the wrong kind of loan may result in the company paying more over the long term.
First: Why Does Your Business Need a Loan?
As bankers, the main reasons business owners seek small-business loans can be narrowed down to two factors expanding their business or fixing cash flow issues.
Loans to Fund Growth
Funds to hire new staff or salespersons. Scaling up is an avenue that can lead to fantastic things. Employing new talent will accelerate your progress, promote growth and help expand.
The purchase of brand new machinery. New tools, new products, software computers, machines, or even computers can allow you to produce your product more cost-effectively and effectively. The expense of purchasing new equipment can be recovered through improvements in processes and improved efficiency. This strategy increases the margins of your business and brings an increase in profits to your bottom line.
Finance your marketing campaign. Marketing can help to expand your reach, gain new territories, and create new revenue streams. Investments in SEO, marketing automation, or a brand new website can make you stand out against the toughest competitors.
A building purchase. Real estate is an excellent investment. It helps build equity and gives you more control over your financial situation. It can also allow you to reduce the cost of rent, lower the tax burden through depreciation, and also expand to take up more space. In the event that you own more than what you could utilize, you could consider leasing it to other businesses in order to generate an additional source of income.
Prepare for a sale. Though your company may be performing well at the present, however, there are plenty of reasons to look for financing. For instance, if you decide to eventually sell your company, you’ll require scaling up to boost the price of the sale. This is a complicated process that requires training for your management team as well as improving your system to run at maximum efficiency.
Finance New Contracts or Products. Another reason to look for business financing is to explore new markets or acquire new products. It is possible that you have something that could be improved using a little engineering. Innovation is a great method to reposition your company in the marketplace and attract an entirely new market.
Loans to Patch Holes
Gaps in cash flow. Yet another reason to consider a small-business loan could be the gaping cash flow that could hinder your company from reaching its objectives. The cash flow gap could be caused by a seasonal decline in sales, unexpected business costs, payroll as well as changes in the pricing of suppliers, and a myriad of other unexpected situations.
Refinancing Debt that is Expensive. Expensive debt can include payday loans, cash advances for merchants as well as accounts receivables-based factoring. These kinds of loans can be appealing because they’re easy and quick to acquire and they pay from sales. They typically come with extremely high rates, regardless of how great your credit is. Even if you are able to obtain a good rate but the terms are usually restricting because loans are granted upon the promise to pay the amount in a very short duration. Because of this, the kind of loan is likely to consume your cash flow. This means that you could end up in an even deeper hole quickly, only to have to repay these debts with additional short-term costly loans. This can result in a continuous cycle of refinancing costly debts with even more costly debt.
Payroll Costs. Payroll and fringes (payroll taxes) are significant expenses. If the management of labor isn’t effective it is possible that you will find yourself in a bind and not be able in paying your staff.
The Solution: Evaluate Small Business Loan Options
The lesson to be learned from this is that it’s crucial to look at the numbers prior to taking on a large amount of debt. This means that you must look over your financials and determine what you can do with the money that you are seeking can ultimately generate more income. Based on the nature of your business it is crucial to comprehend the reasons you are seeking a loan, the expenses of the loan, the method by which it will be paid back, as well as the length of time it takes to pay back the loan.
The reason why these crucial questions are important can be demonstrated with two scenarios.
Scenario 1 The owner of a business has signed several contracts which are scheduled to be paid in the next 3 to 6 months. Without getting into any specifics, as long as the company is well-established and growing, and profitable, the owner of the business could gain from short-term quick financing, even if the loan is a more costly debt, because they will be able to pay back the debt swiftly prior to it eating the majority of the profits.
Scenario 2 The owner of a business is just barely breaking even and decides to increase his business by hiring additional employees to complete an agreement. The only problem in this scenario is the fact that his contract won’t be paid until he has completed the project within 6 to 12 months. If he chooses to take the high-interest rate short-term debt, it is likely to cause a more serious cash flow issue during the interim time when he must pay a weekly or daily installment on the loan. In this scenario, a better option is to comprehend the nature of the business (i.e. that his work takes between 6 and 12 months to pay) and to set himself up with a lower-interest-rate loan or interest-only line credit which he could borrow from and then pay back when new opportunities are created as well as old ones finish and he gets paid.
Of course, these two scenarios are only two of the hundreds of scenarios that small-scale businesses encounter every day. What we’re trying to emphasize is that, based on our experiences, it is essential to determine what is the main revenue driver for your company and the timings for when the revenue is absorbed into your company.
Understanding these basic concepts will allow business owners to determine which types of financing to avoid. Financial choices that are quick and easy may not be the best for all types of businesses however, going to a major bank isn’t the most ideal option also. Working with a lender that has a specialization in small firms however is always a wise option. A good lender and the most appropriate financial instrument for your business is essential to achieving your objectives.
How We Do It
Making use of SBA 7a, the A 7a loan program from the SBA We will develop an alternative financing plan that is designed specifically for the needs of small businesses.
Our business specialists will help you select the right items and the conditions that will allow you to fly high and not sink. We would like to see you flourish and will collaborate with you to ensure your success. We consider ourselves to be more than just another bank and can help you build a better future not just your company’s but also yours.
A few of the things that you can accomplish with a small-business loan are:
- Get the working capital to help your business float during periods of slow growth.
- Purchase furniture, equipment, or even property. A loan with a longer term helps lower the monthly cost of your payments and helps you maintain your cash flow for day-to-day operations within your company.
- Refinance your short-term debts. You might have borrowed wisely however your monthly payments could cause a delay in stabilizing your monthly expenditures. Refinancing the debt could let you access more money and help prepare your business to expand.
- Find new employees. The addition of new talent to the company will allow you to accomplish more. It encourages diversity and will let you take on many more clients, increasing the bottom line of the process.
- Enhance your workplace. The upgrading of your workplace is an excellent method to demonstrate to your employees and your customers that you are concerned. If you’re looking to gain better quality customers or improve your level in service quality, those kinds of upgrades should be carried out frequently.
Of course, these are only one of the ways we help our small-business customers make use of their money. Because every company and sector is distinct We go to extraordinary measures to make sure that the loan you choose is suitable for you. We’re always there for you to trust us for professional financial advice and always be there whenever you need us the most.