If you’re struggling with cash flow and your business needs more funds, you may turn to a small business loan. In many situations, a loan may be just what you need to give your business a fighting chance. In other situations, it can actually spell the end of your brand, even if you get the funds you need.
Don’t automatically assume a small business loan is the best option for you. Before you commit to taking out a loan, make sure you consider these five things first.
Types of Loans You Have to Choose From
If you’re interested in taking out a loan, there’s nothing wrong with weighing your options. That means considering all of the loans you have to choose from. There are likely many more options than you realize!
For example, do you know the difference between a working capital loan vs PO financing? The first is an unsecured loan that can help you continue your daily operations quickly, while PO financing enables you to reimburse your suppliers, helping you manage specific orders.
That’s not all! Other types of loans you have to choose from include line-of-credit loans, secured loans, equity loans, and more. Understanding all of your options enables you to figure out if there’s a loan out there that’s right for your business.
How Fast You Need the Money
Another important consideration is how fast you need the money. If you’re struggling right now, you may find that traditional loan options will not provide you with the cash you need fast enough.
Some loans are faster than others. Online lenders can be an option if you need a loan within a few hours, as long as the amount you need is relatively low. Line-of-credit loans are also relatively popular, as they provide you with a line of credit you can use at any time.
Cash advances, also known as personal installment loans, can also be helpful if you need just a little extra cash right away because they are paid within 48 hours.
Other Ways to Find the Money You Need
Don’t automatically assume you have to turn to a traditional business loan if you need a little extra cash. There are quite a few alternatives that are available to small business owners:
- Crowdfunding can help you raise money from normal, everyday people
- Credit from vendors sometimes comes with extended repayment terms
- ROBS Programs on Your 401(k) enable you to take advantage of your tax-deferred retirement funds
- Home equity loans are a personal way to get more money
Don’t underestimate seemingly insignificant ways to free up more cash. For example, you can ask existing vendors if they offer any discounts that you could take advantage of, or see if you can find sales on services you use regularly. Saving a little bit here and there can add up, possibly freeing up enough cash that you can squeak by without a loan.
How a Loan Will Impact Long-Term Profitability?
It’s true that you need cash now, but how will getting cash now affect your cash flow later? If you aren’t careful, you may simply be kicking the can down the road when you take out a small business loan.
Loans must be paid back over time, which means you’re creating another monthly bill. If you manage to lock down a long repayment plan, you could be paying month after month for many years to come.
Interest is also an important consideration. High interest loans can leave you floundering after the initial funds have been spent, and long loan terms mean you’ll spend more in interest over the lifetime of the loan. It’s important to consider these points before you borrow money.
Time Versus Money
Don’t underestimate the time versus money debate. Time management is extremely important to your business, and if applying for loans is going to take a lot of time, it may not be worth it.
A lot goes into applying for a traditional business loan. It usually involves:
- Locating or obtaining business licenses and permits
- Collecting proof of income and bank statements
- Creating accurate balance sheets
- Hunting down personal and business tax returns
- Payroll records for employees
There’s a possibility that taking out a loan will take up too much time—time that could be spent improving your business without the need for a small business loan.
Don’t automatically assume you need a loan! Consider these points before you go to the bank to make sure you’re making the right decision.