How To Make Smart Borrowing Decisions

Not all businesses need to borrow money in order to stay afloat. Keeping on top of cashflow and growing your business steadily will often help you to expand without major financial setbacks. Yet sometimes borrowing is a part of what allows a company to prosper, or at least to survive a temporary period of financial hardship. It's important to take any decisions around borrowing very seriously, as they can impact your bottom line for months to come.

 

What Is The Purpose?

If you are considering taking out a loan, there should always be a solid reason why you need the money. This should be quantifiable and objective. For example, it's rarely wise to take out a $10,000 loan to "help grow your business". The cash injection should serve a purpose, such as to deal with a tangible cashflow issue, or to purchase of new machinery or premises.

Many small businesses require cash injection at some point to survive, with around 29% of startups failing because they run out of cash. Ultimately, any money that you borrow should be utilised for the benefit of the business, and before going any further you should know exactly what you need and why. You can think about the exact amount later, but for now, just get an estimate.

 

What Are Your Options?

You have established the reasons why you need money, and the ways in which you will use the money you borrow. Next, it's time to consider your options.

The first question to ask yourself is whether there are any other methods you can use to solve the problem. Can you improve your cashflow by increasing your income or reducing overheads? Can you chase up late payments, or make new deals with your clients so that they pay you a percentage upfront? Can any of your partners give you more time to pay invoices?

In certain circumstances, such as if you are looking to grow the business with a certain strategy, you may want to reach out to your investors or partners to raise more capital, or use your own personal savings to reach new heights.

If there are no other options available to you, then loans may be the most appropriate way to raise funds. Bank loans are a traditional course of action. They tend to offer small business loans when plans are reasonable. You could also seek lines of credit or loans from private lenders. If you have a bad credit rating, some companies can offer loans based on factors such as current earnings.

 

How Much To Borrow?

You should already know the purpose of the loan, and now is the time to sit down and establish exactly how much you need to borrow. This should be based on your plan for the money, but also on your plan for making repayments. It's a massive mistake to borrow more than you can afford to repay, as this will only lead to more problems, fees, and fines.

The bottom line is you don't want to end up with a large amount of debt and no way to repay it, especially when interest rates are high. Keep it realistic and well within your means, and always have a way to pay it back, including a backup option for times of financial struggle.

Understand the overall costs of the loan in terms of how much you will repay. This will depend on how much you borrow, the interest rates, and the amount of time that you take to repay. Make sure you are clear about all of the terms and conditions before you sign up for a loan product.


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