Laying It on the Table: Is It a Smart Idea to Start a Business on a Loan?

Telling others that you are thinking about getting a loan for your business can be met with different kinds of opinions. From the cautionary anecdotes to the general naysayers, every single person you come across will have their own versions of what may occur if you take out a loan for business purposes. While it may be true that there are bad reasons for a business to go into a debt, this does not mean that good reasons don’t exist. If you believe that you are ready for the next step and you require a loan to build your business, then here are some reasons as to why you should go ahead with your plans.

1. Expansion of Location

The cubicles on your floor are bursting at the seams and it appears you are having a problem getting an office for your assistance. At this point, you’ve outgrown the location of your office. Or perhaps your new retail store or restaurant is crowded with more customers than you had anticipated when starting the business. This is excellent news as it only means that your business is deemed to grow and you may need to expand soon. However, just because you believe you may need to expand doesn’t imply you have some money at hand to make such a transition possible for you, and that’s why you’ll need to get a business loan quickly to make that happen.

Before you can commit, make an effort of measuring the potential revenue change that may be as a result of your expansion. Is it possible to handle your loan while at the same time make some profit for the business? Make use of your projected balance sheet along with a revenue forecast to determine how your transition will affect the bottom line of the business. If you’re thinking about a particular retail location, do some research about the area to be sure it is an excellent choice for the target market.

2. Building Credit for the Future of the Business

If you are looking to apply for business financing of a larger scale in the future, you can achieve this by starting with a short-term loan to help in building your business credit. Especially if you are a start-up business, taking a loan now can help establish your creditworthiness in the future. Small businesses often find it difficult securing larger loans without strong credit history report. Applying for loans now and repaying them on time regularly will go a long way in helping to build your business’s credit for future financing.
This idea may also assist you to establish a rapport with the lender, creating a connection to look up to when the time comes to apply for a bigger loan. However, you need to be careful not to take loans you may never be able to pay. A slight delay in the payment of a smaller loan may result in denial the next time you apply for a loan.

3. A Loan Will Help Your Acquire Business Equipment

Acquiring equipment which will improve the efficiency of your business is definitely a no-brainer when it comes to financing. As an entrepreneur, you require certain IT equipment, machinery, or other tools to perform your service or create your product. For that to happen, you’ll require a loan. Moreover, if you go for equipment financing, you may find it easier to secure the loan since the equipment you purchase acts as the collateral for the loan you take.

Before taking out a loan for your equipment, be certain you are separating the nice-to-haves and the actual needs when considering the bottom line of your business. Of course, everyone in the company would love a soda dispenser, but unless you are planning to run a soft drink business, this equipment may not be the right investment for your new business.

4. Need for Inventory

One of the largest expenses in a business is inventory. Similar to the purchase of equipment, it’s imperative to keep up with the customer’s demand by ensuring you can add some inventory to your new business. At times, doing this can be difficult, especially if you are looking to acquire large amounts of inventory.

If you are planning to operate a seasonal business, you may want to acquire a large inventory without enough cash at hand. Slow seasons usually precede holidays, thus the need for a loan to acquire the necessary inventory to meet the demand of customers during the peak season.

To determine whether or not a loan would be a reasonable financial move, create a projection for your sales based on your industrial knowledge. Calculate the debt’s cost and compare the figures to the projected sales to ascertain whether an inventory loan would be a prudent choice.

5. The Opportunity Outweighs the Debt

In any business, even a new enterprise, an opportunity occurs every now and then which is impossible to resist. Maybe it’s a chance to order a bulk inventory at an unbelievable discount, or it could be an opportunity to build a retail space. In such a case, determining the ROI of such an opportunity will require you to weigh the cost of the loan against revenue you could be generating as a result of such an opportunity. If you find that the return on investment outweighs the loan obligations, then go for it. However, you need to be keen with your calculations as you could easily underestimate the true costs or overestimate profits as a result of over-enthusiasm. When weighing the benefits against the costs, it’ll help to carry out a revenue forecast to be sure your decision is based on hard figures and not gut instinct.

When it comes to getting a business loan, the important thing is to make sure the benefits outweigh the costs. If that is the case, don’t hesitate to go for the loan. So, if you are wondering whether or not it’s an excellent idea to begin a business without a loan, then you need to remember that it will depend on whether the revenue forecast outweighs the cost.

FG Editorial Team
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