There’s no doubt you’ve heard the phrase “it takes money to make money.” And, in most instances, it’s true. All start-up businesses need capital to get their feet off the ground, and existing businesses need money to launch new ventures.
While all businesses do indeed need money to make money, it’s vital, however, to understand whether or not it makes financial sense to borrow money from a lender. To help you make a wise decision, here are some quick ways to help you know when it makes sense to borrow money.
1. Ask yourself why you are borrowing
The easiest way to know whether or not it makes sense to borrow money is to ask why you are borrowing money in the first place. If you are borrowing to finance a venture that is sure to increase profits, then it’s a great idea.
One way to figure this out is to do some quick math to see what profits you are turning before getting a loan, and what profits you will be turning after. If the numbers show that you will be making more money while being able to pay back your loan and the overall costs of financing, then borrowing is the way to go.
On the other hand, if find you want to borrow money to pay off other debt, it only makes sense if the cost of the loan is less than the current payments/interest on your existing debt.
Another reason you might not want to borrow is if you are considering purchasing new furniture, possibly remodeling your office, or engaging in some type of aesthetic improvements that only offer some sort of satisfaction but does not directly contribute to improved profits above and beyond the cost of financing the project.
A good rule of thumb to follow is to ask yourself “will the money I am borrowing be put toward something that will help me make more money?” If the answer is yes, borrow away.
2. Evaluate the Cost of Borrowing From at Least Three Lenders
There are a wide variety of lenders that offer small business loans today. The rates on these loans vary from lender to lender. One of the most obvious influences on the rates you are offered is your credit history. It is not necessarily your credit score as many lenders offer bad credit business loans, but it is how you manage your debt and your payment patterns with previous creditors among other things. The important point is that each lender has their own criteria or risk tolerance for determining your rates so be sure to consider several lenders when applying for a small business loan. The decision on where you borrow the money is directly connected to whether or not you are ready to borrow.
3. Weigh your options with a long-term view in mind
Deciding whether or not to borrow money for your business is risky. After all, borrowed money is not free money. You have to pay your lender back no questions asked. The idea of being indebted to someone can be scary for a lot of business owners, and this feeling may tempt some owners to give up equity rather than to go into debt with a small business loan.
Finance experts at Entrepreneur.com, however, make a great point as to why borrowing rather than giving up equity may be the better of the two options. They point out that equity will cost you a portion of your business forever, but debt is both temporary and capped.
If you are looking for a short term financial solution, then borrowing and quickly paying back your lender as opposed to sacrificing future profits forever is the much better option, even if it seems scarier up front.
4. Determine how disciplined you are
Another great question to ask yourself when deciding whether or not to borrow from a lender is to ask yourself how disciplined you are. A good metric for measurement is not your credit score, but your ability to plan effectively.
For example, if you are willing to write and stick to a solid cash flow plan that includes details about how you will use the money to generate money all while paying down your debt, then borrowing is a great idea. On the other hand, if you don’t have a plan, you can rest assured that the money you borrow will be gone before you know what happened.
It is not just planning however, it is sticking to that plan. Small business owners are constantly confronted with financial decisions, should I buy this or that, should I pay this bill or that creditor, and this often results in some sort of sacrifice. When borrowing money it is almost always wiser to make paying off the debt the first priority and all others second. Planning and sticking to that plan is critical to successfully managing debt, but having the vision to see future financial issues, things that may arise, is just as important to successfully managing debt. There are always issues that cannot be laid out in a plan because they are still unknown.
5. Consider Potential Pitfalls That May Occur
Nobody knows better than small business owners that any type of business is susceptible to financial problems that come out of left field. Whether it is a broken sewage pipe, a burglary, or simply a slow down in a business cycle, unforeseen money problems are constantly a threat in the business world. Although you cannot directly lay this out in a plan, you can include a reasonable amount of unknown expenses in the cost of borrowing and if the small business loan still makes a profit then it makes sense.
Borrowing money is a great way to fuel your business and propel it forward. However, you must be responsible and plan, have a vision about pitfalls that may arise, and make sure the math makes business sense with the endeavor you are considering.
For more information about getting a bad credit business loan, visit Shield Funding today!