Did you take out a loan when you first launched your business, but haven’t needed another loan since then? If so, you’re in good company. Many organizations are able to get their business off the ground with initial funding and become profitable enough not to need another loan.
Although you might not need a loan to pay your bills, there are other reasons to take out a loan. For example, you might want to preserve your cash flow or keep a certain bank balance to earn interest on your account. Taking out a loan also helps you build credit.
Still don’t think you need a loan? Here are 7 reasons why you should reconsider:
1. You don’t know you need more capital.
Not borrowing enough cash is one of the biggest mistakes small business owners make.
You may not be aware that you didn’t raise enough capital during your first round of funding. Sometimes this reality hits hard when it’s too late to borrow more.
If you didn’t borrow enough money the first time around, apply for another loan as quickly as possible. The longer you wait, the more you risk getting into financial trouble before you’ve had a chance to become profitable.
2. Applying for a loan is easier than ever before.
Could you benefit from some extra cash, but not enough to warrant going through a strenuous application process? Thanks to online financial institutions, the application process is now smooth. A smooth process isn’t the only reason to apply for a loan online. With an online lender, you can get better fixed rates than traditional financial institutions.
How to apply online for a small business loan
With many online lenders, you submit one application that gets distributed to multiple lenders. When your application is approved, you’ll get multiple offers to compare rates and terms. For example, banks.com provides a centralized location to apply for a small business loan from 300+ lenders with one application.
When you apply online, you won’t be tempted to take the first loan you qualify for just to avoid the inconvenience of filling out more applications.
Now that you know the loan approval process is easy online, what would you do with your business if you had extra capital?
3. You’re probably not spending enough on marketing.
A small business loan is a great way to fund an aggressive marketing campaign. Even if you have capital available for marketing, you might be surprised to learn that a high-level marketing campaign costs more than you think. That’s because a high-level marketing campaign gets results and produces solid ROI – it’s worth every penny.
How much money do you spend on marketing? Chances are, it’s not enough. Not because you need to spend a fortune on marketing, but because most small businesses launch marketing campaigns backwards; they determine a monthly budget and then perform marketing tasks within that budget. Most of the time, that monthly budget is too low for the business’ actual needs.
You’re probably not spending enough money on marketing if you:
- Sporadically throw money at PPC ads on Facebook without an overall plan that integrates with all other marketing channels;
- Set your monthly ad spend budget based on a dollar amount that sounds affordable rather than what’s needed to execute a successful campaign;
- Write your own emails and sales copy instead of hiring a professional copywriter;
- Don’t think a professional copywriter is necessary;
- Spend hours learning DIY marketing skills from YouTube or Coursera to save money; or
- Look for ways to save money on marketing, but haven’t hired a professional.
If you’re doing any of the above, you’re not spending enough on marketing.
It’s not the dollar amount that determines marketing success.
Although a successful marketing campaign requires financial investment, the amount of money you spend on marketing isn’t what determines success. Your success is determined by your marketing strategy and a high-level marketing strategy can’t be executed DIY-style.
Unless you’re a marketing professional, it’s impossible to launch a cohesive, effective marketing campaign without paying for professional services.
4. You need to build strong business credit.
Many small businesses will need strong business credit in order to pursue loftier business goals. For example, if you want to expand your business by opening new locations or franchising existing corporate locations, you’ll need strong credit to finance your expansion.
If your business already does well, you can charge a significant fee for franchising opportunities. However, franchisees often rely on corporate for finding locations, obtaining commercial lease agreements, and other things you absolutely need strong credit to obtain.
If expansion or franchising is a future goal, you won’t need capital for a while. However, you won’t be able to get that future capital without good business credit. It takes time to build good business credit, and that’s something best accomplished through loans. While you can get a business credit account, loans often have more favorable terms and lower interest than business lines of credit.
You don’t need to take out a huge loan, but get a medium sized loan that you know will be easy to repay on time and in full. You want a loan with high enough payments to demonstrate your ability to make a decent monthly payment, but not too high.
Avoid taking out a long-term loan because you’ll pay too much interest unnecessarily. You can build credit just as well with short-term loans. Just make sure you make all of your payments on time so you don’t incur late fees or miss any payments.
You might need credit from vendors and suppliers.
When an organization needs merchandise up front, suppliers and vendors are more likely to work with a business that has an outstanding credit score. If you don’t need capital, but might need to do business on credit with vendors in the future, now is the time to start building business credit.
5. Your business is seasonal.
Keeping a seasonal businesses profitable can be tough. Not all businesses thrive financially year round. If your business has a slow or off season, having extra capital on hand will be a life saver. A business loan can help you stay afloat during times when revenue thins out. For example, if you sell patio furniture, you won’t make many sales during winter. Likewise, if you sell skiing equipment, you won’t make many sales during the summer.
Unless you start a business selling both skiing equipment and patio furniture in one location, your revenue will significantly drop during your off season.
If your business is seasonal and you have plans to expand, a business loan will be your biggest asset in developing the credit you’ll need for your expansions to survive during the off season.
6. You’re working with inferior equipment.
If your business can get by using the equipment you already have, but you’d be better off with upgraded equipment, a small business equipment loan can help you get what you need.
Maybe you chose not to get the high-end equipment when you first launched your business and now you’re realizing that was a mistake. Or, perhaps older equipment served you well in the past and now it’s time to upgrade.
Don’t put off getting the equipment your business needs to thrive. You don’t have to spend a fortune, but you should at least get equipment that functions smoothly and won’t waste your time with breakdowns and repairs.
Purchasing equipment with a loan is a tax write off.
When you take out an equipment loan, the IRS allows you to write off $25,000 the first year and depreciate the equipment in future years. If you’re not sure whether to buy or lease your equipment, perform a cost-benefit analysis to find out your best option.
Most equipment loans run for three years or less and are repaid monthly. When your business has solid revenue, an equipment loan is easy to repay.
7. You need to purchase inventory.
When your business needs to purchase inventory, a small business loan can help. Whether you need to stock up for a promotion or to carry you through the off season, a loan will make it easier to acquire the inventory you need.
Inventory loans are usually short-term loans and most companies try to repay inventory loans within one season using revenue generated during their prime sales time.
Every business needs capital.
Unless your business is one of the world’s largest, most successful corporations, you could probably use more capital. While you might be surviving on your company’s regular revenue, with access to more capital, you could be thriving instead.
Think about the current state of your business and consider what would be possible if you had more money. Would you upgrade your equipment? Hire an expert marketing manager? Dive into professional SEO services? Contract that A-list copywriter to write your sales page copy?
No matter how well your business is doing, there’s always something you can improve. In most cases, money can buy that improvement whether you pay for top talent, better software, or expertise.