With SMEs looking to improve their financial standing, founders often wonder when might be the right time to take out a business loan?
Along with the question of timing, how easy it will be to obtain a small business loan that perhaps has fewer fixed assets to support a loan application is worth considering too.
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What Should a Founder Consider About Timing?
Taking out a loan before it’s required may sometimes be prudent. While it does bring forward the cost of servicing the loan by making timely repayments sooner, it provides some dry powder to call upon in difficult times. And as we all know, tough times don’t usually announce themselves with a big sign ahead of time – it pays to be prepared.
Given that both the markets and business conditions can change markedly over just a single quarter, business founders must act when it's prudent to do so. Often, this beats waiting until the absolute last possible moment because some types of loans may require months to arrange.
Will a Business Loan Be Put to Good Use?
What plan is in place for the use of the additional capital?
As a founder, you may expect that funds will be deployed sensibly and well. However, just like with personal finances, it’s always best to have a plan in place before borrowing any funds.
The initial plan may be to leave the money available in the business checking account for the time being. Possibly, it may repay an ongoing line of credit or simply ensure there are sufficient funds.
However, looking beyond that, it’s useful to plan how the money will eventually be utilized. If for no other reason than it guides the discussion about how much is required and whether the founder can qualify for a loan of that size? Without knowing this information, there’s too much guesswork involved.
Is It Going to Be Affordable?
Finding a suitable lender for a business loan is not as easy as it seems. If you’ve never applied for this type of loan through your business, you may be in for a shock.
Certain types of funding are easier to qualify for than others. Also, when the amount is larger (or smaller) than normal, then it’s useful to consider all types of business funding. A company like Advance Point can provide some pointers as to what options they offer, and which will be best.
The cost of funding differs depending on the perceived risk of lending and the type of business that required additional funding. Therefore, it pays to keep your options open. Repayment periods, costs, and the requirements to qualify all differ depending on the funding provider and what’s available at the time.
For founders thinking about raising some capital for future investment in the business, it’s best to aim for growth. This ensures that the additional burden of debt repayments is later met with higher revenues to counterbalance them. Then looking back years later it’s possible to track how funding helped the business to expand as the customer demand grew.
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