The day you decided to go into business with yourself and fulfill that dream of being your own boss is one of the most empowering feelings you can feel as a professional. Gone are the days of clocking in and clocking out and if everything goes right, you can retire early and attain an abundance of wealth. Right? Is that your story?
Entrepreneurship is complex and there is no instruction manual. All of a sudden you are a small business owner with customers, employees, inventory, marketing, payroll, rent, equipment, taxes, and bills. Many days you find yourself working within your business instead of on your business. You are faced with questions like how do I scale? How do I keep everyone happy? Am I making the best decision?
One question you will inevitably face is, Should I Take A Business Loan?
Here is a complete guide to answering this question starting with good reasons to take a business loan.
Good Reasons for Taking a Business Loan
Revenue Generating
What capital purchases generate revenue for your business?
- Inventory – The lifeblood of any retail business is it’s inventory. Obvious yes, but many times retailers don’t buy inventory in bulk because they don’t want to part with that much cash at one time. As an entrepreneur maintaining your cash flow is absolutely necessary to maintain operations. However, if you have a chance to purchase inventory at a discount, this is absolutely a great time to get the funding to do so. Purchase the inventory with someone else’s money and pay down the loan over time. Allow the inventory to get sold as you pay down the loan. This affords the opportunity to be cash flow positive in 30 days or less.
- Equipment – Is there a piece of equipment you can purchase that compliments what you already do? For example, if you sell new tires for vehicles and that’s all you do, it would make sense to buy equipment for tire balancing and alignment as well. Financing your equipment allows you to acquire and use it to make money with little or nothing down. And as you add the services that the equipment provides you are instantly profitable by generating revenue and making small monthly payments towards the equipment. Equipment upgrades can also make your business more efficient and allow you to take on more work than you could before. Point of sale equipment is an exceptional upgrade to business owners who still track everything by hand. New point of sale systems allow you to track inventory and instantly report on what goods or services are more popular. Having this data at the tip of your fingers makes buying decisions so much easier.
- Marketing – This may seem like a no brainer, but marketing campaigns are not that predictable. A business needs to market in order to create demand, but you may not know when it will pay off or if it will pay off at all. Sometimes adjustments are needed or additional campaigns to make it work. Using a short term business loan gives you some breathing room while your marketing campaign is doing what it is supposed to do. Sometimes a little bit of funding helps jumpstart the process, but having enough funding to make adjustments is also crucial to make sure your campaign is successful. For example, a direct mail campaign will most likely need proper reporting and follow up marketing like a drip email campaign. How did the customer respond, online, by phone or did they walk in? Which campaign did they respond to? Did they visit your website?
- Hiring Employees – How great is it when you have so much work, but not enough bodies? This is really common. As a business owner you’ve done an amazing job of generating buzz around your product or service and now all of a sudden you’re in high demand. You need manpower to fulfill this demand and it costs money to hire, train, and pay these people. Appealing to the best candidates also requires offering health insurance and retirement benefits. A business loan can supplement the expenses of onboarding a new employee, training and certifications that are required, and the appropriate supplies or equipment needed.
- Process Automation – Technology is changing the customer experience so quickly it’s hard to keep up. Sometimes the technology is simply better and most likely faster at doing your job than a human can. One example is a hair salon that implements an appointment setting feature on their website. The software takes care of the salon’s scheduling, captures email addresses for appointment reminders, and keeps the scheduling process fluid so the salon can focus on the customer who is right in front of them. We also saw an example of this when medical professionals were required to update their medical record software to an automated system.
Bridge Loan or Bridge Funding
Sometimes an emergency or unforeseen circumstance disrupts your businesses’ cash flow in a way that forces a small business owner to seek funding for their business. Although, we don’t wake up one morning and start dreaming about the one day we take a business loan, getting funding on a short-term basis is sometimes necessary for sustainability. The purpose of this is to literally “bridge the gap” between your current hurdle and your future success. Here are few examples:
- Taxes – It’s April 15th, you just filed your taxes and you realize your business owes money to the government. However, you don’t have the cash to pay your taxes and operate your business. Not paying your taxes on time will lead to penalties, interest, and maybe even a lien on your business and tangible personal property. None of those are really good options and at the end of the day being behind on taxes should be as short term of an obstacle as possible.
- Past Due Invoices – You did an amazing job completing a project for your customer and now they are telling you they need time to pay you. Another ugly reality of being in business for yourself. Avoid going past due on your bills and paying interest or penalties to your vendors. Taking a business loan or business funding is a more than acceptable contingency plan so you can continue on to your next job without any disruption.
- Payroll – Regardless of what is happening in your business, falling behind on payroll is not an option. Paying your employees for hours they’ve already worked and bonuses they’ve already earned is a MUST. Unfortunately, your receivables may lag behind for a multitude of reasons. Keep your employees paid. Remember taking business funding doesn’t have to be a permanent solution for your business, but it is sometimes a necessary short term solution. Keep your employees happy… especially the good ones that are so hard to find.
Business Improvement
There are several ways to improve your business with the help of a business loan or business funding. Whether you are transitioning your business, expanding or downsizing, or struggling, sometimes we all need some good, quality guidance.
Perhaps you need to improve your credit or build business credit. We often tell our customers that if they are bankable, go to your bank and get a business loan. If you are not, we can educate you on how to build and improve your credit so you can eventually be bankable. Contact Dun & Bradstreet and Experian to obtain your business credit report. Then give us a call so we can go over it with you and show you areas to improve.
Pay off your tax liens and judgments. Leaving these on your credit are detrimental to you business. Having a tax lien or an unsatisfied judgment puts your business behind the eight ball in terms of reputation, but also you’re on the wrong end of the collection process. It should be your first priority to pay these off as soon as possible.
Build your cash flow back up. Is there more going out of your bank account than coming in? Are NSF’s, negative days, and overdraft fees eating away at your bank balances? It’s sad but true. This means it’s time to make some changes to your cash flow and understand where your money is going. Or look for some ways to generate income with the ideas listed earlier in this article. It could also be time to let an unproductive employee go, raise prices, or improve the quality of your product or service.
So What is Your Plan
No business should ever borrow money without a plan. Whether you write it down on a napkin or create a complex cash flow analysis, there needs to be some strategy involved.
- Is your bank able to approve you?
- Can you make money with this loan? How much?
- Can you afford this? Is it within your budget?
- Will this money help your business? How?
- Do you need to make some cuts to your business?
- Do you “need” the money? Why is it a “need” instead of a “want? Big difference.
- Is there ways in which your business can be saving money? Call your vendor’s competitors and start negotiating.
- Can your business survive a nominal price increase to its goods and services?
- Are you looking for a long term solution or a short term solution?
- Do you need access to money frequently? How frequently? Why?
- Will this loan help you clear an obstacle?
- What gap(s) are we trying clear?
Create a plan around the questions above as it relates to your decision to borrow money. Our experienced team here at Better Business Funding is also well equipped to support you and ask you the right questions.
Let us know if we can help with your plan or help answer the question, Should I Take a Business Loan?