Small business loans can be powerful tools to grow your business or simply cover the everyday expenses critical to maintaining the health of your bottom line. Taking on small business loans, however, means dedicating part of your future cash flow to repaying them. Before you commit, there's one very important question to consider: Is a small business loan really necessary?
What Are Small Business Loans Good For?
Small business loans can be put to work in a number of ways. For example, you could use small business financing to:
- Open a new storefront
- Move operations to a larger space
- Buy new equipment
- Hire staff
- Consolidate debt or refinance
- Expand inventory or a product line
- Help with a cash flow shortage
As you can see, small business loans offer plenty of possibilities. Whether your focus is something small, like raising working capital, or something big, like opening a second location, a loan can be a tool for reaching those goals.
Gauging Whether a Small Business Loan Makes Sense
When you're trying to determine whether a small business loan is the right move, it helps to think about the ROI (or return on investment).
For example, let's say you own a successful salon. Client demand has continued to grow year over year, and you're strongly considering opening up a second location. To do that, you estimate that you'll need to borrow $100,000 to lease a space, make repairs and renovations, install equipment and hire and train new staff.
What you have to evaluate is whether the revenue you expect the new location to generate will justify the cost of borrowing, once the interest and fees are factored in. Conducting a basic ROI analysis can give you an idea of how the numbers compare. To do that, simply divide the estimated revenue by the total cost of the loan.
Compare Your Small Business Loan Options
All small business loans aren't created equal, and the type of loan you choose should reflect your overall goal. A term loan, for example, may be right if you're tackling a large-scale renovation and you need more time to repay it. A working capital loan, on the other hand, might be the better choice if you need to borrow money for short-term needs and you can pay it back relatively quickly.
Beyond looking at the type of loan, consider the finer points of borrowing. Specifically, what can you expect for interest rate, APR and fees? What are the minimum requirements the lender expects you to meet?
There's one other factor to consider: Small business loans are generally classified as debt financing, but for some businesses, equity financing may be the better choice. In the next part of our series, we'll dive into how equity and debt financing stack up.
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