Should you take a Small Business Loan

There are many ways to get additional funds to grow your business and a small business loan is one of the most popular means to do so. While it may seem like the obvious choice in some cases, it is important to evaluate the requirements of your business plan to ensure that this is the best option for you.

What is a small business loan?

A small business loan is a type of business finance used by small businesses to fund their operations. These loans are tailored to meet the needs of a small sized business and are often used to ensure the smooth day-to-day functioning of the organisation.

It is aimed at business owners who need quick access to business capital to pay for office space, equipment, employees’ salary, purchase of materials, and more. These loans are disbursed without much restriction of usage.

When should you opt for a small business loan?

A great business plan can come to a halt due to a lack of funds. Everything from daily expenses to acquisition of new machinery and inventory can add up and leave a small business in the lurch. In such a situation, a small business loan is a great option to cover operating costs to keep the business going.

If you are a small business owner looking for a loan product best suited to your needs, a small business loan is worth serious consideration.

Why should you take a small business loan?

1. Planning an expansion:

Every business plans for expansion at some stage of its life. But, funds may not always be available when the right opportunity arises. The need for larger office space, relocating, hiring more employees, purchasing new equipment etc. becomes crucial as the business grows. In such cases, a small business loan can be very helpful.

1. Building good credit:

Bad credit history has come in the way of many business owners looking to get their loans sanctioned. If you are planning to apply for larger loan amounts in the future, it is advisable to start small to build good credit.

Taking a small business loan and regularly paying your instalments can help you build a favourable payment history.

1. Increased working capital requirement:

As businesses expand, the need for working capital increases. This includes the need to hire fresh talent, and an increase in headcount would result in a hike in operational costs to the company. A small business loan can come in handy for such requirements.

1. New business opportunity:

A new business opportunity may require greater retail space, larger stock of inventory and new equipment. Consider the return on investment in such a case and if it outweighs the cost of debt, it is advisable to take a small business loan.

When should you rethink your decision to take a small business loan?

While we discuss the advantages that come with small business loans, it is important to know the adverse impact of availing these loans. Among other factors, it is imperative to make sure that your business is financially sound and will be able to repay any loan you take.

Here are a few things you should consider before you apply for a loan:

• Lack of a clear purpose:

Determining exactly why you need a loan can help you answer a number of related questions. Does the purpose justify the debt and its cost? Is it advisable to take a loan to purchase an asset that does not serve any long-term purpose? Identifying the purpose of the loan will help you determine a suitable loan tenure.

• Cost of debt outweighs potential benefits:

Every business takes into account the return on investment, and most debts are taken keeping the expected ROI in mind. If you know that your business prospects and opportunities may not justify the cost of debt, it might be time to rethink your decision.  

• Cost of using assets as collateral:

Lenders may be hesitant to give loans to start-ups unless there is collateral or lien to secure it. In the event the borrower does not pay back the loan, the lender has all rights to seize the possession of the property or collateral in question and sell it to recoup the loss incurred. If it involves a lien, the lender can take complete possession of the business or a part of it, to retrieve any loss incurred to them.

Every business is different and has different reasons for taking loan. It is necessary to make sure that the loan product you opt for, suits the requirements of your business and the cost justifies the risk you take.

Taking a loan can help you facilitate the growth of your business if you do thorough research and make an informed decision. If you are unsure of your knowledge of the world of business finance, it is better to consult a financial advisor or to approach a reputed lender to ask relevant questions to help you weigh the pros and cons of availing a small business loan.