Entrepreneurs who are doing well in their businesses usually aren’t looking for extra money. And those who are struggling and could use a little boost may not qualify for some small business loans. That being said, when is the ideal time to apply for and take out a business loan?
Benefits to Taking Out a Small Business Loan
Let’s start by talking about why you’d want to take out a business loan.
Sometimes you have trouble making ends meet. This is especially true for businesses that are seasonal, who may have more revenue coming in during some months and less in others. These slow periods may make it hard for you to pay your business expenses. Taking out a bank loan can ensure you have the money you need.
Another benefit to business loans is how they can help boost your credit. Borrowers who pay their loan payments on time each month may be able to increase their credit scores. Lenders like banks, credit unions, and other financial institutions report your payments to credit bureaus, which helps you build positive credit history.
Depending on the interest rate you qualify for, sometimes your business financing options can be incredibly affordable, particularly if you qualify for an SBA loan from the U.S. Small Business Administration, which offers some of the lowest interest rates available.
You may also qualify for zero percent interest introductory rates with business credit cards. That means you can charge what your business needs without paying any interest at all, typically for the first year. If you have a rewards card, you can also rack up rewards points you can use for travel, cash back, and gift cards. Win-win!
When to Get a Business Loan
So the question is: when should you apply for a business loan? The answer may surprise you: take it out when you have good credit and aren’t desperate for the money, when cash flow is strong. The better you can meet lenders’ eligibility requirements, the lower interest rates you’ll qualify for and the more loan options you’ll have. That may not be the case when you’re scrambling to pay your bills.
Plan ahead for financing you’ll need down the road. If you don’t want a lump sum of cash right now that you will have to start loan payments on right away, such as with a term loan for working capital, consider a line of credit, since you can borrow from the line whenever you need it, whether that’s a little now and a little in a few months.
Many loans require a personal guarantee, so make sure you’re in a place where you feel comfortable making that guarantee. If you are required to put up collateral or a down payment, you’d need to have that lined up before you apply for a loan.
Another good time to apply for a loan is when you’re looking to buy a piece of equipment or real estate. There is special equipment financing you can qualify for where the equipment you’re buying (or the real estate) acts as your collateral, which may help you get a lower rate.
When NOT to Get a Business Loan
Waiting until you can’t afford to pay your employees isn’t the time to take out a loan. It may be too late to prevent the cash crunch that’s likely just around the corner. Another reason to not wait until things are dire is that you are less likely to be able to afford to pay back a loan, and lenders will see that and consider you a risk to lend to.
If you run a startup or new business less than two years old, you might consider waiting to apply for a loan because many banks want you to have an established business that has proven itself to be stable.
If your business and/or personal credit scores aren’t great, this might not be the best time to get a loan. Your personal credit history does play an important role in determining whether you’re eligible for financing with many lenders, and others look for your business credit scores, so if those are low or you haven’t yet established business credit, consider investing time and energy into doing so in order to qualify for great financing options. Keep an eye on your credit report and watch your credit rise when you pay bills on time and reduce debt.
The caveat to having bad credit is that, certainly, you may still qualify for financing with some online lenders, though know you may not be able to get an unsecured loan with a low annual percentage rate. If you absolutely need the money now and are willing to pay a premium, consider merchant cash advances or short-term loans, and plan to pay them back as quickly as possible to minimize the interest you pay on this type of loan.
Another time NOT to get a business loan is when you can’t make the monthly payments. If you’re strapped for cash, how will you be able to add the monthly repayment to your budget? You risk defaulting on the loan if you can’t make those payments outlined in your repayment terms.
Also beware of taking out more than you can handle. You may be approved for a higher loan amount than you needed, and it might be tempting to take extra, but realize that will come with a higher monthly payment, and you’ll pay more in interest on a larger loan.
Business Financing for Your Needs
Smart small business owners take out financing before they need it. They carefully monitor their business and personal credit so they can maximize the best offers based on their scores.
This year, plan ahead. Foresee any larger expenses you may have in a few months, such as needing to buy equipment, hire employees, or expand your office space, and find the right small business financing for your situation.