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Are Business Loans Worth It – 4 Cases When Taking Out a Loan Makes Sense

Small business loans can help your company grow… at a price. Discover why that price may be worth it for your business.

When you find that your business’ financial situation has become a bit uncertain, you might feel compelled to seek external financing. Luckily, there are plenty of business lenders that can help you in this area. From bank loans to online lenders, the number of options can be mind-boggling.

But that doesn’t mean business loans are for everyone. Each lender will have a set of requirements you’ll have to meet if you want to apply for a loan. What’s more, you may be in debt for quite some time. This means it might be a lot more challenging to get another loan the next time your business has a shortfall. 

With those disadvantages out of the way, are business loans worth it?

Yes, but only if you have a good reason for taking one on. You must know why you need the funds and the likely outcome of getting hold of those funds. 

To begin with, the return should be high enough for you to repay the loan with ease. Even then, it might not be worth the risk unless you can also use the loan to secure a corresponding boost in revenue and profits.

To help you figure out if you could benefit from a business loan, here are the most common reasons that may make external financing worth it:

Reason #1 – Expanding Your Physical Location

Let’s say that you’re ready to bring more staff into your office. Or maybe you run a coffee shop that’s filling up every day, so you want to have more space for your customers. That’s great, you’re ready to expand!

But do you have the cash you need to do it? If you don’t, applying for business credit may be in order. 

Generally speaking, this would call for a financial product with a long-term payoff. Before you make this commitment, though, you must plan ahead.

How much more money will you be able to make after the expansion? Are there any future threats to your revenue or cash flow? These are only some of the questions you must answer. After that, figure out how much you can easily afford to repay each month. 

Reason #2 – Building Up Credit Score

Many small businesses struggle to get an adequate loan. While they might make it through the application process, they’re only able to borrow a small amount.

This might be because they have problems proving that they’re a reliable borrower. More specifically, they might not have a strong-enough credit history.

The good news is that there’s a clever tactic for fixing this…  

You take out smaller short-term loans that you can easily repay. You don’t even have to spend the money. Just take out a small loan and make the monthly or fortnightly loan payment. Your lender will report your prompt payments to the credit bureaus, which will improve your score.

Ideally, this is something you should do long before you actually need a big loan. It’s a great way to build up a good credit history before setting your sights on larger loans.

Besides, this tactic can help you develop a good relationship with your lender. Once you’ve proved yourself reliable, they ought to be more willing to offer loans with higher amounts and better terms.

Reason #3 – Buying More Inventory

Categorised as assets on the balance sheet, inventory is a major investment for retail and manufacturing businesses. To keep everything running smoothly, you must ensure that your business is well-stocked. 

This can sometimes prove difficult if you run into a shortfall elsewhere. You might run into a situation where you don’t collect money upfront for your goods. If you offer payment terms, for example, you still have to pay for the raw materials or stock for future sales first.

For a retail business, you may have an opportunity to buy in bulk and lower your cost basis. The only problem is, you need more money for that. Similarly, you might want to stock up in anticipation of a rise in demand. This is exactly why Kevin took out a business loan.

Kevin runs a wholesale and retail butcher shop. With the holidays approaching, he wanted to make sure he wouldn’t run out of stock. For that, he needed to borrow additional funds.

However, the bank rejected his application. This is common, as banks often have tight lending standards.

Luckily, Kevin found another avenue. His accountant suggested that he look for a non-bank lender. Kevin applied for a loan and received the funds in good time. Within 24 hours, the money was in his account and he could buy the stock he needed. 

There are many available options if your business ever needs outside financing. You’ve just got to choose one that works.

Reason #4 – The Opening of a Sudden Opportunity

Once in a while, you may stumble upon a great opportunity. But you probably won’t be able to finance it in-house every time. 

Rather than allowing that lucrative opportunity to slip through your fingers, you can take out a small business loan to fund whatever needs funding. 

You do need to be extremely careful with this. Be realistic in predicting what you’ll get from the opportunity. The potential reward should be attainable and ideally far exceed the cost of the loan. 

Plan Ahead

At the end of the day, there are many situations where you could use a cash injection. Fortunately, there are also a wealth of options to explore. From credit cards to long-term loans of all sizes, there’s a loan product that can meet your needs.

The most important thing to remember is to always crunch the numbers. The consequences of defaulting on a loan are too grave to leave anything to chance. Gather all the important numbers, weigh the pros and cons, and make a well-reasoned decision.

If you’re ready to take out a loan, Unsecured Finance Australia can help. We offer online application and quick approval, often in less than 24 hours. To learn more and see if you qualify, visit our website.

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