When should you borrow money to fund your business

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Date: 20 April 2020

Businessman looking at turnover figures to work out whether he needs a business loan.

There are many ways to fund a start-up business. One readily available method is to borrow money from a financial institution. However, when is the right time to borrow money? Many start-up businesses rely on borrowed money as working capital. When running your business, you might need a loan to finance other expenses.

Determining when it is the right time to borrow money will require a little effort and an assessment of your business finances. In this article, we have laid out simple steps to guide you through and answer some key questions that can help you assess your business efficiently.

Understand why you need the cash

Whether you are managing a small business or a huge company, you need to determine first the reason why you need to apply for a loan. Putting your business into debt is both a liability and responsibility. The most efficient way for you to assess if you need a loan is to ask yourself questions like, "will this help my business grow?" or "will this increase my sales?".

For instance, if you need to improve your facilities or add features that would increase profit, then borrowing money is a good move. However, you need to be careful when making such decisions. Sometimes upgrading machinery or improving management can become the variable that brings your business to success.

Fact: Creating a business plan gives you an overview of where you need to use the money. It can also inform you about the current status of your business when you need to evaluate and perform an inspection.

When you have identified the reason for taking out a loan, you can check on different lending companies for loan options. There are online lending companies, such as CreditNinja.com, that offer easy loan applications. Financial institutions like banks are a good option, too. Shop around, do not limit yourself to one lending source.

When is the right time to borrow money?

There is no definite answer to this question, yet there are vital pointers that can act as a guide. Answering the following questions will help you determine if borrowing money is a smart move for your business.

Is my business earning a good profit?

If your business is already earning a profit, borrowing money can be the right decision. Lending companies will look at your business' background and a business that is booming will have a better chance being approved for a loan.

Moreover, businesses earning good profit can afford to repay the monthly loan obligations. On the other hand, taking out a loan to save a sinking company is not a good idea.

If I borrow money, will it help me increase my profit?

Borrowing money to improve customer experience (like upgrading the interior of your coffee shop or adding more services in your machine repair shop) is a good idea. Upgrading the fixtures on your coffee shop, both the interior and exterior, will entice customers into checking out your products and services.

Likewise, adding more services to your machine repair shop will attract potential clients to have repairs done in your company. Both are good reasons that can improve your business to gain more profit, which makes taking out a loan a smart move.

Do I have good current cash flow?

If you have confidence in your business' cash flow, then taking out a loan is unlikely to lead you to future trouble. If your business remains stagnant and faces hurdles along the way, you will have to shoulder the monthly loan payables from other resources. Borrowing money to boost your business while relying on future profits to pay monthly loan repayments is a risky move to take.

Advantages of borrowing money for your business

Borrowing money is a practised method for all business types, and business owners benefit from its advantages.

For instance, rather than using your personal savings to fund your business, taking out a loan is more practical. Your savings are intended for your personal use. Using them as a back-up funding resource for your business removes the primary purpose it originally served.

Moreover, borrowing money to fund a business helps you create a business credit profile. Timely monthly repayments establish a good credit profile. This is important as lenders report your payment record to credit bureaus. Your payment history will show that you have a good credit status.

A good business credit profile increases the chance of being approved for future loan applications.

Takeaway

Borrowing money for your business can be a good decision, but first you must determine why you are borrowing the money. Recklessly taking out a loan will put your business at risk. Taking time to assess the state of your business first will help you determine whether borrowing money is a wise move.

Copyright 2020. Featured post made possible by Tiffany Wagner, Credit Ninja

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