Loans are an integral part of all businesses big or small. In times of financial needs these loans can help the businesses to keep their doors open. A business can require financial assistance for various different reasons and at different phases of its life cycle.
You might need a loan for starting up your dream project or to expand and modernize or to recover from a financial wreck caused due to unforeseen situations, the reasons are plenty. However, understanding the need for a loan and how the money would add to the prospects of your business is of utmost importance.
There are plenty of sources of finance available to meet your needs.
There are the traditional sources of funding like traditional commercial loans from the banks, Grants offered by the government for various categories and for various reasons, loan guarantees by the SBA (Small Business Administration), and non-traditional sources like friends and family, angel investors, merchant cash advances etc.
There is no dearth of channels of funding; however, one should be wary of indulging in meaningless borrowing because if these funds are not utilised in a proper way, it might lead the business into a pit of financial uncertainties in due course of time.
Knowing why you need funds is very important.
If you are facing difficulties in meeting the day to day expenses of your business, then something might be fundamentally wrong with operations. You might want to analyse the reasons for these irregularities rather than immediately applying for a loan. Cutting down the workforce or making an upgrade in the technology might help.
Apply for a loan only if you think your business really requires it. Remember that all loans need to be paid back with an added interest. As far as possible, try to resolve the issues without taking loans. You might be denied of a loan when you really need it in the future because of the existing loan riding on your business, so be careful.
Having said that, sometimes a small business loan is necessary and it’s important to understand what you’re committing to. Study the rate of interest and the time of repayment carefully.
Ask yourself if you can generate enough revenue to pay back the loan amount in the committed time frame, failing which foreclosure might be imminent. And above all whether the small business loan extended to you would help you in achieving the goals you have set for yourself.
The type of loan to be applied for will vary depending on the nature and the need for your business. If your business is seasonal you might want to go for short term loans and if you have a rotational business you might go for a long term loan. Therefore it is important to understand the nature of your business before applying for a business loan.
Similarly you should also be able to judge the efficiency of your workforce and production capacity of your business because those are the primary factors that will help you in achieving your goals in time and generating profits to pay back the loan. If you trust your workforce and have faith in them, a loan would not prove to be a burden.
Keeping all the above mentioned points in mind you should develop a sound business strategy before getting into any kind of financial assistance. If you approach financing in the right way, your small business will grow in leaps and bounds.
About The Guest Author: Founded in 2007, Biz2Credit is a leading small business loan marketplace connecting small- and medium-sized businesses with lenders, service providers, and complementary business tools. Visit the Biz2Credit website and follow them on Twitter @Biz2Credit for small business news and updates.
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Very wise advice, particularly advising businesses to be sure lending is essential. Understanding terms and conditions and repayment terms is something many businesses overlook when desperate for finance which can easily destroy a businesses finances. Always understand repayment terms and have a structured plan of what you’re going to use the money for.