Four Tips for Using a Small Business Loan to Grow Your Company
If you’re a small business owner, you know your business’s struggles. Whether it’s keeping up with supply and demand, adjusting to new trends, or trying to expand your business, there’s no shortage of the issues small business owners face. A loan can be your best option when trying to grow your business, or get through a challenging part of the year. As much as its inevitable to experience challenges when running a business, the financial aspect of it shouldn’t be part of the challenges. That’s why it’s essential to seek funding from reputable firms that have good track record to help solve your cash glow problems. Seeking a loan is necessary, but what should you do after you receive it?
A small business is not like a human being, as it cannot directly communicate with you to tell you what it needs or what you should do to improve it. If you know you need a loan but aren’t sure what to do with it, you may feel massive confusion. That’s where this article can help. It focuses on the four best tips for using a small business loan to help you grow your company.
What Loans Should I Get for My Small Business?
Before you can know what to use the loan for in your business, you must first understand the best types of loans available for your small business. It may seem easy to enter your bank, or the nearest funding institution and ask for a loan, but it’s never that simple. There are many loans available for all purposes, and there are financial institutions dedicated to each one.
Fortunately, the lending industry focuses on small businesses with a specific subset called working capital loans to help them get the money they need.
A working capital loan is an option a business owner can take out to help them meet their current needs. Working capital loans have many benefits. They are unsecured loans, so you can avoid having to put up collateral, such as property, to acquire one. They also exclusively focus on businesses, so they can come with added benefits to your business should you decide to get one.
However, as the loans are unsecured, you need an adequate credit score for the loan amount you seek, and a low one may cause you to face rejection when applying, or higher interest rates if your credit score is low.
Working capital loans come in many different forms, including:
- Term Loans: These loans come in short-term, intermediate-terms, and long-term variations. If you’re an entrepreneur, a short or intermediate-term loan is among the best options for start-ups working capital loans, as they are more traditional loans and only require a good line of credit.
- Invoice Financing: If you’re looking for one of the best small business capital loans, look no further than invoice financing. While this is a secured loan, the collateral you put up to get this loan are the invoices for your business. This is a potentially expensive option for small business owners. But, so long as you maintain your business and stay on track with its payments, this option can help you get money quickly and address your short-term goals.
- Merchant Cash Advance: MCAs are one of the best working capital business loans if your business focuses on credit and debit cards to receive payments. In this option, you receive a lump sum of money immediately. From there, the MCA provider will receive a certain percentage plus interest for every purchase your customers make. So long as your business maintains revenue, this loan option is ideal for small business owners.
- Business Credit Card: Opening a new line of credit for your small business can help you achieve greater loans for working capital down the line as you continue to build credit throughout your business operation. Several business credit cards can help you get more benefits, making this option an excellent choice for a budding business.
These are among the best working capital loans available for your business to get the money it needs at the right time. Now that you have a better understanding of these loans, it’s best to understand how to use them once you get them to take your business to the next level.
Refinance Your Debts
While taking out a loan to handle any business debts may seem ironic, it is still a viable option. If your business has outstanding debts hurting your bottom line, another loan may help you address the current ones, and help you with the one you take out now.
If you’re planning on going this route, the best bet for your business is to look for a loan that can address your debt and that you can pay back in a manner that won’t hurt your bottom line. That’s where a Debt Service Coverage Ratio (DSCR) loan may be the best option.
A DSCR loan is a type of financing that uses your business’s income as collateral and it looks at your ability to repay the loan based on current and future income. This makes this kind of loan attractive for those with limited collateral or credit history.
In order to get DSCR loans to be approved, lenders must have confidence in the borrower’s ability to generate enough income from its operations or investments over time to pay down the debt. To calculate this ratio, lenders compare the total amount of cash generated from business operations before taxes and expenses with the total amount owed in debt payments each year.
Refinancing debts can help your business get your debts in order and consolidate them into a straightforward payment plan rather than paying multiple debts at different intervals.
This sense of organisation is critical for any businesses looking to simplify its day-to-day operations. It can help your business have a clearer idea of how the cash flow and debt repayment will occur until it pays off the loan.
However, if you do not organise your debts and your responsibilities to the lender while taking the loan, your business could bear the brunt of the negative consequences. It’s also best to ensure your business has a steady cash flow before taking this option, as many loan contracts require you to repay the loans at set intervals.
Move From or Renovate Your Business Location
If your small business is working out of an older building, or hasn’t seen maintenance or a remodel, renovating your business is a great option. A loan will make it easier to hire a maintenance team to add new rooms or a fresh coat of paint to change the aesthetic of your office for a more modern and professional look.
However, a renovation could prove more expensive than moving your business outright. In this case, moving your business to another location is ideal. With a loan, looking for new properties for rent is more manageable. It can also help your business tap into a market in a new location while retaining customers from the previous site.
If this is the plan for your small business, it’s always best to see the options for renovations or moving before taking out the loan, as these are costly endeavours that could pause the operations of your business.
Open a New Location
If your small business began with one physical location, a loan could help you open a new one. Imagine if you could double your revenue or more with a new site or help you gain a wider audience. That’s where a loan can help you if you do not have the capital to get a new location on your own.
The benefits of a new location are limitless, and it can also help you repay the loan comfortably, so long as the second location is successful. In some cases, the new site may make more than the original, so repaying the loan is simple.
If you’re planning on opening a new location, you must have a clear plan to open it and present it to the lender before going through with it. Not only can this help you plead your case to the lender, it can also give them a clear idea of your goals, which may make negotiating for a lower interest rate easier.
Keep Up with Your Competition
While comparing yourself to others is never the best idea, this is not the case when you run a business. If your competitors are using advances in technology that you aren’t using to get ahead, you must follow suit, or potentially lose your customer base.
Of course, it’s not always simple to learn what your competitors are using, so it’s best to keep an eye on the trends in your industry, and see what the standard tools are so you may take advantage of them.
It is also crucial that the techniques, or equipment your competitors are using apply to your business as well. An advance for an e-commerce store selling clothing might not apply to another store selling accessories. In this case, taking out a loan is a potential mistake.
Another possibility is that their advances are too costly despite the competition’s tactics. As such, it is vital to fully understand the costs of any new tactic or technology before deciding if it’s right for your business.
Frequently Asked Questions
What is an essential factor to consider before using my loan?
As with any financial decision, you must have all the information you need to use your loan correctly. Knowing where your loan is going and how you will pay it back are the best ways to handle your payments and negotiate for the best possible loan.
Why are working capital loans ideal for a small business?
Working capital loans are ideal because they are unsecured loans, and the business income plays as much of a role in approval as your lines of credit.
How should I decide where to use my loan once I receive it?
Unless your business has an immediate issue, such as debts, or a lack of inventory, the best way to use your loan is what will help your business earn more in the long run.
Your business will only grow if you put your time, effort, and money into it. Whether you want to keep up with the competition, refinance your debts, or expand your operations, knowing how to use a loan is crucial for the success of your business. Now that you understand the best loans strategies for your business, you can use them to your advantage, so your business can reach the goals you set for it with ease and efficiency.