Growth requires capital. Often, growing small or midsize enterprises (SMEs) can’t fully fund expansion with in-house resources. Sometimes, you can only pursue major business development opportunities by borrowing money. Of course, borrowing adds risk. So, how can you decide when it makes sense to borrow, and how do you minimize the risks? Once you do decide to borrow, where can you quickly get the resources you need?
When to Consider Pursuing a Business Loan—and When Not To
Your borrowing should be part of a thoughtful business development plan.
For instance, if you’re considering expanding, first forecast the revenue you expect to generate. Then, forecast the associated costs—loan costs, moving costs, higher utility bills. By integrating these forecasts with your current balance sheet, your business development plan can project how the move will affect your bottom line.
Before taking out a business loan, consider your motivations. Some opportunities that look great at first may not survive careful due diligence.
If you’re considering borrowing for a major equipment purchase, clarify your objectives. Can you estimate increases in productivity? Will you be able to create profitable new products or serve new markets?
Consider, also, the tradeoffs between leasing, borrowing and outright purchasing equipment. For example, lower-cost leases may not require financials, are typically tax deductible as operating expenses, and you’re not locked into specific equipment that might become obsolete. If you borrow to own, the depreciation is yours to claim, and the equipment itself can often serve as loan collateral.
Before taking out a business loan, consider your motivations. Some opportunities that look great at first may not survive careful due diligence. Others pursue loans because they’ve already maxed out other credit sources and are still struggling. Instead of borrowing, that’s the time to make realistic plans to manage existing debts and carefully consider why they haven’t yielded the anticipated return.
Choosing the Right Business Development Lender
Nowadays, there are many potential sources of capital for business development, each with advantages and disadvantages. It’s important to compare costs and terms, and that’s not always easy.
One way to simplify borrowing is with a fixed-fee loan that helps you plan ahead. Others can help solve a cash flow squeeze: you choose the vendors you want to pay, the loan provider pays them directly, and you pay back later with the lender’s fixed fee tacked on.
As you compare lenders, timing is crucial. If you take out a business development loan before it’s necessary, you may end up making more payments than a better-timed loan. Moreover, the marketplace may change before you use the money, increasing your risks. Conversely, if loan proceeds arrive too late, you may miss your opportunity altogether—for example, if you borrowed to finance seasonal inventory .
So you’d like to get your money just in time. Today, some loan providers can review and often approve your loan in minutes or less, and provide funds soon thereafter—especially if you already have an ongoing relationship, such as a business credit or charge card. Don’t forget that you may be able to address smaller short-term cash flow issues by carefully using the cards themselves.
Business loans and credit can help a growing business expand more quickly and profitably—if you use them as part of a broader business development plan and make thoughtful choices that don’t add unnecessary cost, complexity or risk.
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