Loans and Lines of Credit: When Entrepreneurs Should and Shouldn’t Apply

by on November 14, 2017

In a perfect world, you’d never have to look to financial products like loans and lines of credit to stay afloat or evolve as you run your business. Ideally, you’d rather have the capital to handle financial emergencies and ventures without assistance. However, if you’ve been an entrepreneur long enough, you know that cash rules. If you don’t have enough of it, you look to companies who will lend it to you. Since loans are, however, borrowed cash that must be repaid with interest, applying for one should be done with caution.

Private lenders like Lending Club and local banks offer loans and lines of credit to businesses of all sizes. With the purpose of helping them get through difficult and celebratory times, loans offer the upfront cash you need to do everything from grow your business to pay for the rent and new staff. As borrowing funds comes with a huge responsibility, it is not a decision that should be taken lightly.

Applying for a Loan Makes Sense When…

You can repay it – What most entrepreneurs fail to realize is that business loans are taken out by looking at your personal and business credit. Failure to repay it can impact your personal and business credit history making it harder for you to receive loans in the future. Not to mention, not paying a loan back on time leads to late fees and other associated costs which drive up your debt.

You have decent credit – Like all loans, your credit history will matter when applying for a business loan. If you and/or your business do not have established credit, or have less than perfect credit, your chances of being approved for a loan are lowered. Even if you are approved, you’ll be asked for collateral and need to pay higher interest rates. Make sure that you have a good credit score both personally and professionally before applying.

It will grow your business – The whole purpose of taking out a loan is to help you get from one level in your business to the next. If borrowed funds are only going to tide you over, you’ll need to borrow funds again and again. However, if taking out a loan will help you to invest in your business so that it brings in more revenue, the loan was well worth it.

Applying for a Loan Doesn’t Make Sense When…

You have a lot of debt – Adding debt to debt is a recipe for disaster. If you’re already dealing with a lot of debt, applying for a loan (unless it’s a debt consolidation loan) isn’t beneficial to your business. If you’re dealing with serious amounts of debt, perhaps debt management solutions are best fitted for you.

You’re using it for personal reasons – Many new entrepreneurs mesh the lines of personal and business matters together. If you’re trying to apply for a business loan with the purpose of using it for personal reasons, this isn’t a good idea. The idea of the loan is to put it back into your business so that it can generate revenue for you. However, when you take those funds and pay your bills or go on a vacation, you’re not helping the money to grow and will still have to find some other means to repay the loan.

You don’t have a clear business plan – Startup funds is often one of the main reasons that entrepreneurs apply for a loan. Essentially, they need the cash to start their business and have the ability to pay it back over time. However, if you don’t have a clear business plan, not only will you be rejected, but you may not even have a solid business to build revenue. Your business plan tells you what your goals are, what the industry is like if there’s a need for your product or service, and ultimately how you intend to earn profits. Without one, you’re aimlessly starting something that may or may not be successful.

There are a lot of ways to grow your small business and loans just happen to be one of the most commonly used. Though loans can be a lifesaver and financial foundation for you as an entrepreneur, they are temporary forms of relief. With that being said, you must assess your ability to repay and your personal financial credit history to determine if applying for a loan will help or hurt your business. As it is only then that you can make the most informed decision about your borrowing funds to help shape your financial future.

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