When does a small business loan make sense

bank loan

Going into debt for your business might not seem like a good idea, but there are reasons when it becomes a necessity. Weighing the costs of taking out a loan, whether a substandard loan or a traditional loan, could prove fruitful. If you are in a position to take a leap, but you lack working capital, here are three reasons why applying for a business loan makes perfect sense.

1. You want to expand the physical location.

Perhaps you have outgrown the initial office location. Or, your customer base at your retail store has increased and your activities can no longer fit comfortably inside the space. This is very good news because it indicates your business is growing. To accommodate that growth, you need to expand your existing location.

However, being ready for expansion is not an automatic indicator that you have the necessary cash on hand to finance the project. Before committing on the dotted line, do some precautionary evaluations to assess potential future changes in revenue. Basically, you want to know that covering the cost of the loan will not interfere with maintaining adequate profits.

2. You need to build credit for future endeavors.

If your plans are to seek business financing on a larger scale within a few years, starting with a small short-term loan may help to build your business’s credit profile. Often, young businesses have a difficult time qualifying for large loans through traditional lending sources. Many owners lack a strong credit history.

Making regular on-time payments on a small loan will help to build future business credit. In addition, this could be a way to build a relationship with a lender. You will have a connection to go back to when it is time to apply for a larger loan.

3. You need to purchase inventory.

One of the biggest expenses for any business is inventory. It is essential to keep up with demand by replenishing your stock with high-quality options that your customers are demanding. However, this can prove hard at times when you need the inventory well in advance of getting a return on the investment.

The best thing to do is measure whether this is the right financial move and the right time to do it. Do this by reviewing a sales projection that is compared with the previous year’s sales around the same time. You will have a general idea of how much profit to expect compared to the amount of inventory needed.

Regardless of the reason you have for considering a business loan, if the numbers add up to an improved bottom line, then it is worth it.