Getting a small business loan is one of the best things you can do to expand your business, but it’s not always clear when it’s the right time to get one. To help you, we’ve put together a list of situations that can help you tell whether now is the time to apply for your next small business loan.
5 ways to tell that now is the time to get a business loan
There are several times in the life cycle of a business that you may need financing to take things to the next level. The key is to be proactive to avoid getting the funding too late. Here are some potential signs that you need a business loan now.
1. You’re nearing your capacity
If you’re outgrowing your physical space, a business loan can help you get the money you need to get an upgrade. The same goes if you or your employees are feeling spread too thin and you need to make some hires to improve efficiency and productivity.
If you have a product-based business and you’re having a hard time keeping up with customer orders, that extra cash can give you the capacity you need to stay ahead of the demand. It can also help you upgrade your equipment, which can assist in keeping production on track.
2. You need a cash cushion
If your business is seasonal or you’re expecting irregular cash flows for another reason, it may be wise to apply for a business loan, so you don’t have to worry about making it through to the other side. It can also help you avoid having to cut prices to move inventory and make layoffs at a time when you may need operations to stay the same.
Keep in mind, though, that if your business is seasonal, you may have a tough time getting financing from traditional lenders, who may prefer steady revenues every month. But there are plenty of alternative financing options to consider.
3. You want to start building a business credit history
If you expect you’ll need financing at some point in the future, the sooner you start building a credit history for your business, the better. A small business loan can help you achieve this goal. It’s not the only option, though, and it may not even be the cheapest.
Traditional commercial lenders may not be willing to give you financing if you don’t have a strong track record already. And while there are online business lenders that may be willing to work with businesses without a credit history, they typically charge high interest rates.
A business credit card is another way to help you build a business credit history as you use the card regularly and pay on time every month. What’s more, you can avoid interest charges altogether if you pay your balance in full.
4. Opportunity is staring you in the face
If your business takes off faster than you thought or you receive an offer from a client that you can’t refuse, getting a small business loan can help you get the resources you need to make it happen.
Just be sure to do your homework to make sure the opportunity will help put your company in a better position financially. Also, if you need money fast to achieve your goal, look specifically for lenders that can provide quick funding.
5. Your business is in good enough shape to qualify for top-tier terms
Sometimes, the best time to get a business loan is when you don’t need it. You never know what’s going to happen in the future, and if your business credit history and financials are solid, getting a loan now with the best terms possible can give you the flexibility to adapt to potential headwinds or expand on your own terms.
When not to apply for a business loan
Just as important as knowing when to get a business loan is understanding when it’s not the best idea.
Specifically, it’s best to avoid trying to get short-term financing to address a problem that needs long-term solutions. It may act as a Band-Aid on the problem, but if you don’t address the root causes, you could end up struggling down the road to pay the money back.
It’s also a good idea to avoid applying for a new business loan if you’re already maxed out on credit. If you have business credit cards with high balances or other loans you’re struggling to keep up with, adding more debt to the picture can do more harm than good.
Finally, it’s usually not a good idea to apply for a business loan unless you have a specific plan for paying it back. That may be included in the business plan that you’ll share with the lender to show that you’ve thought it through. If you don’t have a plan, though, or your plan is to hope and pray it works out, you may be better off staying away.
The bottom line
A business loan can provide a lot of flexibility and opportunity to small business owners. But it’s important to be aware of the state of your business and when it’s the right time to apply for a loan.
If you’ve done your research and decided that now is the time to apply for a business loan, be sure to shop around and compare several small business lenders before picking the one that’s the best fit for your business.
This article was originally written on May 9, 2019 and updated on December 10, 2020.