The saying goes, "You have to spend money to make money." But how can you tell the difference between investing in yourself and digging a hole you'll never climb out of?
For many small business owners, taking out a loan can seem like the next step to really grow their business. But it naturally breeds caution, as many a small business has crumbled under the weight of massive loan debt.
So is now the right time for your small business to get a loan? Are you doing it for the right reasons? Do you know all the necessary steps and information? How can you be prepared for everything the process throws at you?
Follow our steps below to make sure you're ready.
Why Do You Want a Loan?
Just like taking out a personal loan, a business loan should only be done for the right reasons. There's only one good reason to take out a business loan: to help your company expand, increase production and go to the next level.
So what's a bad reason? That would be if you're already struggling to stay afloat. Taking on more debt when you're losing money is like piling more people into a lifeboat that's already full. Either way, you're going to drown.
Preparing to borrow can be daunting, but it can also be the boost your small business needs to take things to the next level. You might be stalling at your current level and need an influx of cash to grow your business. If you're using the loan to build a new factory or get a great deal on supplies, your head is probably in the right place.
How to Find the Right Loan and Lender
Before going to a lender, figure out how much you need. You don't want to walk into a bank's office and not be prepared to explain what you need the loan for, why you need that specific amount and how it's going to help your business.
You also need to know what you're looking for. Is this a small-term loan you can pay back quickly? Is it a more substantial loan you'll need 10 years to pay off? Do the math and make sure this decision won't hurt your cash flow more than it will help it.
Remember not to settle for the first offer you get. Check out a variety of lenders to make sure you're getting a fair deal. You can also try to refinance if interest rates go down, but always aim for the lowest initial rate. Those interest rates will make a big difference in how much you owe a month and how quickly you can pay off the loan.
So You're Ready to Take the Plunge?
Once you're prepared to take out a loan, you need to get all your documents in order. You will likely need the following:
- Business plan with concrete details
- Personal and business credit history
- Past financial statements as well as projected statements
- Cash flow projections
- Personal guarantees from principal owners
Getting all your documents together will also help you evaluate if you're in a good spot to take the loan. No matter how much you feel the loan will help you, use the documents listed above to help inform that decision.
Making the Decision
At the end of the day, only you can decide if your small business is in a position to benefit from a loan. Borrowing is always a gamble, but gambling on yourself is what entrepreneurship is all about.
Take into account the information you've found here. If you do decide a loan is in your best interests, comparison shop business loans on LendingTree to find the best lender.