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Before You Take Out a Business Loan

Starting a business usually takes more money than you have on hand. There are materials you need to buy. People you have to pay. Office space you need to rent or purchase. And ideally, you’d like to be able to take some sort of salary.

It’s a big hurdle to get over when you have an idea for a business. These days, there are a few ways you can try and get money to start a business.

There are investment firm and venture capitalists looking to find the next hot startup. If your business is a little less trendy, you can use your personal and professional networks to find investors. Many people will turn to friends and family first.

If you manage to build a decent online presence, you can try for crowdfunding too.

While these options definitely work for some businesses, other would-be entrepreneurs struggle to pull together enough finances. This brings us back to one of the oldest ways to get money for your business: a loan.

It’s Practically Free Money, Right?

Anyone who has had to take a loan out before knows it comes at a cost, and not just in interest. You’re committed to repayment. Failure to payback a business loan can result in your company closing, your credit being ruined, and your personal life becoming compromised.

Though that sounds scary (and rightfully so), it doesn’t mean you can’t take out a business loan. In fact, many businesses take out loans and lines of credit and leverage them to success they would have otherwise never achieved.

But before you sign your name on the line, there are a few things you should consider.

Is it Absolutely Necessary?

Have you tried other options for attaining funds? Is there anyway you can bootstrap the business, using your personal finances/income to fund it until it starts making money? Is there a more basic version of the business you can start with that won’t require you to get a loan?

For most people, taking out a loan should be the only viable option left.

How is Your Credit?

Business loans will typically check both your business and your personal credit. Assuming your business is new, it’s not going to have much leverage in the way of credit. That means the pressure will fall on your personal credit.

Credit, of course, doesn’t just affect whether or not you get a loan, but what the terms of that loan are.

If you have bad credit, you could have a hard time getting a loan for your business or end up with very high interest. Try improving your credit before taking out a business loan.

Can You Afford to Pay It Back?

Getting a loan won’t magically turn your business into a money making machine. It takes time to build stable revenues and growth. Meanwhile, you’ll need to be able to start paying this loan back.

The question is, will you be able to?

It’s tricky since you don’t know how quickly your business is going to grow. You need to assume the worst when considering how much you can pay back. What’s your current growth rate? What are you projections for the company? Could you make the loan payments out of pocket while the business is growing?

Make Sure Your Finances are In Order

You should always be on top of your business’s finances, especially when you’re taking in someone else’s money. You need to know where you stand, what your cash flow is, and where your money is going.

This can be a lot to keep track of for someone who is also trying to get a business off the ground.

That’s why it can be very wise to utilize professional accounting services. It’s much more affordable than bringing on another in-house employee to manage finances. At LWS, we provide a wide range of small business accounting services in the Springfield, Ohio area.

Whether you’re taking out a loan or not, give us a call, and we can help keep your business financially healthy.

Posted by admin | in Accounting, General Finances