If you are a relatively new business person, the first major financial decision that you will make is whether to take out a loan or not. You will likely need a loan at some point in the financial life of your business. However, the timing of this loan can make the difference between the growth of your business and just going into debt for no reason.
Here are some of the benchmarks that you should check for before you try to expand your business with a loan.
Make sure that you have a profitable business in the first place
You may think that a profitable business is the least in need of a loan. You would be right in this case. You must understand the reason that a bank gives a loan in the first place! Banks do not give loans to save businesses or shore up expenses. The more that you are in need of a loan, the less likely that your banker is to actually give you one!
Use loans to expand a business that is already profitable, not save a business that is hemorrhaging your money already. Trying to shore up a business with a loan is the fastest way to go into debt with no recourse. However, a smart banker will not give you a loan in this situation anyway.
Make sure that you have a specific purpose for your loan
A business loan is a misnomer in a way. You are not taking out a loan for a business in general. The smart way to use a loan is to take it out for a specific purpose within a business. Maybe you need to repair a piece of profitable equipment that is now a bottleneck if it does not work. Perhaps you need more storage space because you are expanding your inventory to meet demand. If you cannot put your finger on exactly why you need the money, then you do not need to borrow the money.
Do you have a timeline for paying back your loan?
Not only do you need a specific purpose for your loan, but you must be able to draw a direct line between that loan and getting more money in return. This will allow you to draw up a timeline for the repayment of the loan as well as how large of a return you can expect from it over that time period.
Although the situations above are not the only times that you should consider taking out a loan, most successful loans will fit one of the above three situations. Regardless, make sure that you have a plan for any money that you borrow. Your banker will certainly have a plan for it. Keep in mind that if you are rejected for a loan many times, you may want to take the expertise of the financiers into account. Banks are not in the business of giving loans to risky ventures. If you are not getting the loan that you think that you need, then you may need to turn inward and shore up some of that risk.
Steve Breitman trained as a CPA and has over 30 years of accounting, financial and operational management experience. He graduated Magna Cum Laude from the University of Texas at Austin, with his BBA degree in Accounting. He is the founder of Mindful Business Solutions, Inc. and helps a multitude of businesses with their finances.
