How to Know the Best Time to Apply for a Business Loan

Let’s face it. It’s difficult to start a business. In fact, it’s even more difficult to run one, especially when you’re strapped for cash. Close friends and relatives don’t seem like they’ll come through for you. This leaves you with only one option: Taking out a business loan.

However, taking out a loan isn’t an easy affair. In fact, from the stories you may have heard from others, a loan can be dangerous if you don’t have a repayment plan. It’s okay to be cautious about taking out a loan because the last thing you want is to rush into a financial decision that may end up costing your business.

On the other hand, you don’t want a lifetime opportunity to walk past you because you don’t have the necessary funds. Propelling your business to the next frontier needs financing such as a business loan, but when is the best time to take out one?

Here are various scenarios that indicate it’s time to take out a business loan.

  1. You Need to Boost Your Cashflow

Business has its highs and lows, and that’s normal. However, what keeps the business afloat is careful planning for the future so you can counter any eventualities.

Some of these eventualities include a low season where business is slow, and cash flow may be irregular. For this reason, you need a way out, and that is through a business loan. This way, you’ll never have to stay up all night trying to figure out a workaround for the reduced cash flow, which may hurt your business. 

This includes cutting down on prices to lure in customers which only means you’ll sell products or services but get only losses in return. There’s also a possibility of laying off some of your employees in order to cut down on operation costs.  

While applying for a business loan may sound like a way out, it’s important to note that seasonal businesses find it difficult to convince traditional lenders to extend installment just right loans since business performance matters to them. Lenders want to see regular revenues each month. Nevertheless, don’t let that kill your ambition. There are numerous alternative lenders waiting for your application.

  1. A New Opportunity is Calling

When starting a business, the main focus is on growing it. This happens when you start receiving regular clients who then open the door for bigger opportunities. However, opportunities may come calling much sooner than you thought.

In some instances, you may get a big client with a huge order, but only one obstacle stands in your way of locking in and fulfilling the deal: Finances. With a business loan, you have the funds and backing needed to acquire the necessary resources to see the deal through.

Since the deal may require quick financing, you may want to search for lenders who offer loans fast. In addition, before taking out the loan, it’s vital to analyze the deal in question. Will it improve the business in terms of finances? How long will the deal last? What’s the interest?

  1. You’ve Grown

At some point in life, kids get older, and they move out to start a life of their own. Their growth and businesses are no different, they grow as well. During the startup days, you worked from your home’s garage or from a van, but now the business has outgrown the physical space. 

Also, you may have a single employee who helps you run errands but due to the growth, he or she may be feeling a bit overworked, and this affects productivity and efficiency. 

Taking out a business loan will provide you with the cash needed to move into a new location. It will also help you hire new employees to boost productivity and enhance efficiency for better production and service delivery. Furthermore, you’ll also have funds to purchase better quality equipment to help you deal with customer orders and tracking them.

  1. You Have No Credit Profile

This is one of the reasons why many lenders, especially traditional ones, decline business loan applications from young startups. They have no credit profile, or their history isn’t as long as lenders may want to see.

Sometimes taking out a loan doesn’t mean you’re in a tight spot financially. It could be a strategy to help your business qualify for bigger loans in the future should you need them. A business loan is a great place to start when building a credit history. 

You can also opt for a business credit card which is another fantastic way of building a credit history for your business fast. This is because you’ll need to repay the card each month. In doing so, you’ll dodge the hefty interest charged on the card if you repay the balance in full and on time.

  1. You Can Qualify for Bigger Loans

Again, taking out a business loan doesn’t mean you’re in a financial fix. It could be the loan terms at that point are favorable for your business because the company has a stellar credit history and its financial health is perfect.

Remember, the future is unpredictable and by securing a business loan with favorable terms, you’ll have an edge over your competitors. For example, you can start expanding in order to reach new markets or even prepare for tough times ahead.

Why You Shouldn’t Apply for a Business Loan

Applying for a business loan or any other loan for that matter requires careful planning. Without planning and in-depth research, chances are your business will close shop with lenders hot on your heels trying to put your business on sale in order to recover their money. 

Now, that would be a nightmare ending to what you thought would be a fruitful entrepreneurial journey. However, you can avoid ending up in such a situation by evaluating your business and understanding when it may not be a great time to take out a loan.

  • First off, understand the problem at hand. For you to solve any problem, it’s vital to understand the problem itself. In this case, the main question you need to answer is, what type of financial problem is your business facing?

Is it a short-term or long-term problem? If it’s long-term, then a short-term financing solution will not get you off the hook. Instead, it will only act as a painkiller trying to cure cancer. The best way of dealing with this problem is by identifying the root causes. 

For example, if you’re in debt, identifying how you ended up in debt will be a great place to start. Then, craft a plan to help you get rid of it. Piling up more loans will not fix the problem.

  • You’ve maxed out your credit. You don’t need a financial advisor to tell you this is a bad idea. If you’re under credit pressure, that is all your credit lines and existing loans are maxed out, then taking out another loan is not the answer. Instead, figure out a way of managing the existing debt. 

Also, consider investigating why these loans didn’t yield the returns you expected. Review your previous decisions with the aim of identifying the flaws.

  • Have a solid repayment plan. Applying for a business loan involves a lot of boxes to check off. Apart from your credit history, do you have the means to repay the loan? In short, can the business afford to take out the loan at that particular point in time? 

Keep in mind, your lender will want to know how you intend on repaying the loan. With a plan in place, the lender will see that you have taken the time to think through the decision to take out a loan. If you don’t have one, then keep off the loan treadmill.

Final Thoughts

A business loan is a great way to get your business out of a financial jam or even help you to secure opportunities. Nevertheless, loans can turn out to be a trap if you don’t have a solid repayment plan, or worse yet, no understanding of your financial situation.

To help you out, consider employing a qualified operations manager or a bookkeeper who can help you handle the company’s finances. 

Once you’re satisfied with the company’s financial position, be sure to search for the best small business loan lenders in the market. The key is to find a lender who understands your business.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.