They say that money makes the world go around. This statement can’t be more accurate in the business context. However, a problem arises when businesses and companies cannot keep up steady cash flow to justify their business activity. Or for when they want to expand into new markets.
For a business or company to run, it needs to have money pulsing through its veins. Without it, paying bills and salaries, producing goods and services becomes an impossible function.
After the recession nearly a decade ago, small businesses in America have been having a hard time recovering. Coupled with the recent pandemic, you have a recipe for disaster for upstarts and other companies. Understandably, revenue went down, and bills kept piling on. In times like these, most businesses closed shop and went under; others that managed to survive are struggling.
It is also normal for some businesses to take a loan to keep their heads above water in such circumstances. Though taking a loan may be the last-ditch effort to save your company or business, it might not be the worst. It is essential to break the stigma around liability and the concept of taking loans.
This article will be talking about the positive and negative aspects of taking business loans. Here are five things that we think you should know before opting for a business loan.
Know your finances
When the time comes to take a loan, a business owner should know exactly where she/he stands financially and what level of exposure should they take on. Not every business has the capability to take on the added responsibility of loan repayments. And sometimes, entrepreneurs just end up making abysmal decisions due to the lack of expert advice.
One of the significant issues that business people face in the modern age is that many have little accounting knowledge. Knowledge of finance and accounting is imperative when it comes to running a business. A business entity is so much more than merely the addition and subtraction of cash. Accounting systems and bookkeeping are essential parts of business activity that need to be taken seriously. Either consult an expert before taking a loan or get informed yourself.
With the ease of access to online learning, a masters in accounting online might be the perfect starting point for you. Not only will it give you an extra something to add to your resume, but it will also equip you with the business insight you need to succeed.
Don’t compromise on cash in hand
Though you may not think of it, taking a loan even when you have the money might be a wise business move. Many financially sound individuals and businesses still opt to lease machinery or take loans, despite being able to pay for it in cash. Why do they do this? It’s simple.
One should never compromise on their cash in the bank. If you have the money, that doesn’t mean that you spend it without considering other options. A healthy cash reserve can come extremely handy in an emergency such as a financial crunch. Simultaneously, leasing equipment is a more innovative way of acquiring new machinery than eating up all your cash reserves in one go.
A loan doesn’t always have to mean a death sentence; it can mean that you don’t want to take a risk with your cash. Doing so can be a brilliant move that guarantees that you will have some money for emergencies and a steady cash flow for the business to live off.
Know how much you are paying
When it comes to taking a loan, many business owners know rough facts and figures about the exposure they are taking on, but not the details. They may know the monthly repayments, but that’s usually the extent of their financial knowledge. Ignorance is bliss, but not always.
It would be best to know accurate and in-depth information about what you are paying in the long run and how much money is leaving the business. You should know the loan’s total duration, the interest rate, the amount you are paying in total, and the monthly payouts. Coupled with the inflation adjustment for the next few years, you might better understand what you are paying out and what this loan REALLY means to your financial situation.
It may seem like somewhat of an understood fact, but many business owners only see the immediate benefits of the cash and fail to consider how difficult it can be to pay back.
Do you have the collateral?
It’s never as straightforward as the banks or loan companies make it out to be when it comes to taking a loan. You may think that you can get the loan fairly quickly, and some people do, but many others don’t.
When you take a loan, not only are you buried in a fair amount of documentation, but you also need to put down an asset as collateral. This is because the lender does not want to give a loan to a party that does not reassure repayment. Sometimes, people just take the money and bail.
Before you apply for the loan, you have to go through a blizzard of paperwork and set down a token as collateral. This collateral is usually a tangible business asset or private investment – something secure so that the bank has surety of a return.
A loan default affects your credit score
In America, nearly everything is based on your credit score. You can’t even order internet services to your house if you don’t have a solid credit score which they can count on.
Maintaining agreed-upon payment plans is the best way to keep a high credit score and ensure that you have a reputation for asking for a loan. Failure to adhere to the agreements and defaulting on the loan can dampen your score and make it hard for you to be taken seriously as far as credit is concerned.
If you don’t think that you can make the payments, don’t risk messing up your credit score. The consequences can have lasting effects on your everyday life, and your financial stability can face significant issues in the future.
Conclusion
Taking a loan is usually a huge business decision and requires a considerable amount of planning. If you are taking on the liability, there is a strong chance that you don’t have many other options left. If that is the case, we strongly suggest that you consider the factors mentioned in this article as they could give you better insight into what it means to take a loan and what the future holds once you have received the cash. As a final tip: once you decide that you will be taking out a business loan, consider various options before heading straight to the bank!
