Thinking of a Business Loan? Here’s When It Makes Sense to Borrow

Thinking of applying for a loan but unsure whether it’s the right choice?

This is a common situation for business owners, whether they’re just starting or have decades of success behind them. In this quick guide, we’ll break down the main situations in which borrowing money makes sense.

When Does a Business Loan Make Sense?

There are a few situations and opportunities that make business loans make sense.

Growth Opportunities

First, the best ways to use business loans are those where your business stands to grow. Think about the expensive purchases you need to make to expand your business. Whatever they are, if they add up to a decent ROI, then they’re worth borrowing to take.

Some of the most common examples would be direct business expansions. This could be a commercial mortgage or simply leasing out new space for production or other purposes. For SaaS companies, it can be a major investment in software solutions, data storage, or other crucial infrastructure.

The category of “growth opportunities” can be broad, but it’s one of the core reasons why business loans exist. Taking risks on expensive opportunities for business growth is what makes many great businesses great in the first place.

Most types of business growth opportunities can easily be seen as justifiable by a lender. In other cases, growth opportunity loans are specifically named loan products. Regardless of what any label says, a big growth opportunity is a good reason to take a loan.

Inventory or Equipment Investment

Like growth opportunities, but more immediately necessary, borrowing for what you need to keep your business running always makes sense.

Buying new inventory is often a struggle. When you need to make sudden bulk purchases and when new inventory is reaching your shelves, financial hiccups can always occur. Making the expense manageable with a loan is a normal and universally accepted reason to apply for a loan.

Cash Flow Smoothing

If your business faces major seasonal fluctuations in cash flow, there are business loans for that. Most lenders work with many businesses with seasonal fluctuations and can arrange the right loan for your business.

Another example would be long and/or unexpected delays in receivables. You can often sell or collateralize your invoices to lenders as a measure to smooth your cash flow. But you don’t always need to do that; a regular business loan with regular collateral (or an unsecured loan) will suffice.

Building Credit History

You may not need a business loan now. But when you do want one, it’s best if your business has some credit history.

Credit builder loans are small, controlled loans with reasonable rates and terms. Their purpose is largely independent of your current financial situation, but of course, the funds can and should be used for some business expense or another. But the real purpose of the loan is to provide you with a safe path to improving your credit.

Emergencies

Lastly, no one like to have emergencies, but sometimes they can’t be avoided. Online business loans can be pre-approved and disbursed in a matter of a few days. So, if you need cash immediately to cover a business emergency, that’s a valid reason for taking a business loan.

Business Borrowing Precautions

If you feel hesitant to take a business loan, that’s a normal and healthy feeling. If you’re reading this article, you’re likely wondering whether taking a loan now really makes sense.

There are some primary precautions to take when considering a business loan. These precautions can come in the form of a few simple questions:

1. Do I have a clear plan to repay the loan?
2. Are the rates and terms affordable and the best I can find for my circumstances?
3. Is this loan solving a temporary issue, or is it avoiding the emergence of a deeper problem?

Essentially, it’s your responsibility to weigh your options and choose the right course of action. You need to make sure you want to loan that you’re looking into and that you can pay it back. It’s also ultimately your responsibility to weigh the feasibility of your business finances and determine whether a loan is a net benefit.

How to Decide If You’re Ready For a Business Loan

Here’s a quick checklist of what you need to have for a business loan to make sense for you:

• A valid reason that a lender would see as acceptable.
• A clear and detailed business plan.
• Reliable cash flow and/or financial projections.
• Understanding of the total cost of borrowing (APR, fees, penalties).
• A realistic repayment timeline.

In addition, a strong credit history would put you in the best position to demand the rates and terms that suit you.

Business Loans Around the World: UK vs. Australia and South Africa

Let’s have a quick look at how UK business loans compare globally.

• UK: Access to Start Up Loans, traditional banks, and fintech lenders. Government guarantees for small businesses.
• Australia: There are government initiatives like the SME Recovery Loan Scheme. You can find supportive banks, but high documentation requirements. Lending platforms can match you with Australian lenders.
• South Africa: More limited options for early-stage businesses, but the government and private lenders offer business loans. Fintech and micro-financing are growing, offering. millions of Rand loans with pre-approval in 24 hours.