There are thousands of different types of small businesses. Each small business is unique in its own way. However, one common thread that runs through each and every small business – no matter what type – is the need for adequate funding.
For every entrepreneur, there will come a time during the life of their business when they need more capital. For some businesses, a startup loan will take the business from the planning phase toward creation of a real company. For other entrepreneurs, their established business will need a fund infusion to move forward. For others, a cash crunch will require an emergency loan and quick access to money.
But taking out a loan isn’t a small decision – you don’t want to borrow more than you can repay, and you’ll have to pay interest either way. In the case of a serious emergency, you don’t have a ton of choice about when to take out a loan. But if you’re looking to get started or to grow, you have a lot more flexibility. So, when is the right time to take out a loan? Too early and you’re paying more interest than you need to, plus you may not be able to make full use of the cash. Too late and you risk getting jammed into a predatory loan and end up paying an arm and a leg in interest and fees. How do you decide?
You May Not Need A Loan
If you’re trying to get your business off the ground or grow and existing business, you should have a thorough business plan in place. That’s the place to start when deciding when to take out a loan. What, exactly, might you need a loan for? If you’re looking to buy expensive equipment or property, you probably can’t do it without a loan. If you’re looking to expand more slowly, however, you may find that your cash flows will be enough and you don’t actually need a loan at all. You don’t want to take out a loan if you don’t have to, and it may be worth it to slow your pace of growth just a little bit so your cash flows match your cash needs.
If you’re worried about a short-term cash flow problem rather than a longer-term growth issue, you should still dig out your business plan and your detailed budget. You may find that there are places where you can cut out expenses or extend credit with your vendors and get through a tight patch. You’ll also need to figure out why you’re short on cash in the first place. Is it a one-off event like needing to repair an expensive piece of equipment or is it an ongoing issue? If you’re consistently falling short, a loan isn’t a long-term solution. You may want to take one out to get you past that rough patch, but then you’ll need to focus on cutting costs and raising revenues so your business stays in the black.
So When Do I Need A Loan?
You’ll want to start looking at loans when you can’t cover your funding needs without it. Buying a building generally requires a mortgage, for example. If you’re going to make that kind of purchase, remember that getting that kind of loan takes time. You’ll want to start reaching out to lenders before you even start shopping for that big purchase. They’ll want to see your financials and your business plan and they’ll let you know how much you can borrow. You may find that you can’t get a loan big enough to cover your needs, in which case you’ll need to adjust your business plan. That may mean waiting for a while before making the purchase or it may mean making changes to your operations so it’s easier for you to cover larger payments.
If you’re in need of short-term cash assistance, your timeline is going to look different. It may take months to get a commercial mortgage in place but the whole point of a short-term loan is that it’s fast. That said, it won’t be instantaneous. If you’re looking at your budget and realize you’re headed toward a shortfall, reach out to your lender sooner rather than later. That gives you time to figure out how much you can get and shop around to make sure you’re getting a good deal.
You’ll also want to consider what kind of loan you’re taking out. Traditional loans may have to go through multiple rounds of negotiations before you can get pre-approval. Then it’ll take some more time to actually get the cash. The timeline varies depending on the amount and type of loan, but it may take months. Microlenders are another popular choice for small businesses, and they tend to be faster than traditional lenders. They’re specifically tailored to smaller operations and usually give out smaller loans, which expedites the whole process.
The most important thing is to make sure you actually need a loan – why pay interest when you don’t have to? If you do actually need a loan, start putting out feelers sooner rather than later. Essentially, you want to open up your options as soon as you think you might need a loan, but you don’t want to actually take out that loan until you’re certain it’s the right move.
For more detailed information on available loans, including alternative lending options, refer to Accion’s resource Finding the Right Source of Financing for Your Business.