- Emma Parker
- June 23, 2021
If you are running a business, you know that there will be times when you feel the need of borrowing money, but many entrepreneurs fight shy of borrowing money because they do not know the ideal time for it.
Whether you take out a secured business loan or an unsecured one, you will have to analyse your business performance carefully. You can consult a financial counsellor if you struggle to come on one side of the fence or the other.
However, this blog discusses situations when you should avoid borrowing money for your business.
Your business is not generating enough profits
It may seem very important to borrow money sometimes, for instance, you need to buy equipment, but you should still think carefully about your decision. As you know that you are to pay off the money and interest, you should check whether you will have enough cash for it.
Here come your business profits. You should check your business profits to see if they are enough to keep up with repayments. You can find out the average monthly profit with the help of last years’ income statement.
If you have noticed that your monthly profits are not enough to meet all your day-to-day business expenses along with debt payment, you should drop the idea of borrowing money.
If you have compared the profit and loss statement of a couple of years and notice that your profits are gradually declining, it can be a red flag. Take notice of these factors to decide whether it makes sense to borrow money at this time or not.
You have to pay off other debts
Even if you are taking out secured business loans, they can be slightly expensive. However, to keep your business growing, it can be tempted to borrow money regardless of bearing your financial obligations in your mind.
If you have already taken on debt, including your personal loans, you should always try to pay them off first before applying for a business loan. A rule of thumb says that you should settle down those debts first.
This is because as a small business owner, it will put a lot of burden on you. You may not be able to keep up with payments along with your day-to-day business expenses. However, some people borrow money to pay off other business expenses or loans.
Never make this sort of mistake. This is because you are not saving your money in interest, but you are spending more money on interest payments, making it more complicated for you to stick to debt payments.
You want to fund payroll
You may be tempted to take out a business loan to fund payroll expenses. However, this situation arises only when you want to retain your best employees and do not have enough money to give them a pay hike.
It seems more favourable than firing and recruiting new employees, which can be time-consuming and expensive. Although this seems a good idea, it is not actually.
If you do not have enough money to give your employees a pay hike, how will you pay off the debt? Of course, it will be a disastrous situation.
So, when can be the ideal time to apply for business loans?
You have got to know when you should avoid borrowing money for your business. The next question is when you should not avoid it. Here are the circumstances when you can do it.
You are expanding
Expansion is an excellent reason for borrowing money. Of course, your business is climbing the ladder up. A business loan can help you buy equipment or office space that you can pay off with generated profits.
So, paying back the loan will never be a problem at all. However, it is essential to research because some lenders still want you to be consistent with profit-generating.
Ensure that your profile matches the lender’s criteria and they lend you money at affordable interest rates. Do proper research. A few online lenders like London Loan Bank can help you get money at affordable interest rates.
You want to build a business credit score
There are times when you may need to borrow a large amount of money and for that you need to have a good business credit score. As far as it is about small funding, you can get money even though your credit score is not that good.
However, this is not the case with long-term business loans. If you are looking to improve your business credit, you can take out a business loan. However, do not forget that you have enough funds in your reservoir to pay it back.
You have got a golden opportunity
If you have got a superb opportunity that you do not want to refuse, you do not have enough monetary resources to carry it out. If you are confident that you can quickly benefit from this opportunity, you can consider taking out a business loan.
It is always suggested that you should carefully consider your financial situation and repaying capacity while borrowing money. Business loans are undoubtedly expensive, so it is crucial to ensure that your business generates enough profits to pay off the loan.