Should your company take out loans? Four Factors to Consider
Taking out a loan is a big decision for any business. Some companies take on loans to expand, but others use them to catch up when they fall behind on payments or need cash to weather a storm. Before you decide whether or not your company should take out a loan, it’s important to consider several factors first:
Whether or not you should take out a loan is one of the most important questions that every business must answer.
Take out a loan, or don’t? That is the question. It’s one of the most important decisions any business owner must make, but it can be difficult to know what factors should inform this decision.
To help you make sense of it all, we’ve highlighted four factors that will help you determine whether or not your company should take out a loan:
- What are my needs right now? How do these needs align with taking on more debt?
The first factor to consider is whether or not your company has a solid credit history.
Before you apply for a loan, your company needs to make sure that its credit history is strong. In general, the higher your credit score is and the longer you’ve had it, the better your chances are at getting approved for loans.
When considering whether or not to take out a loan, a lender will look at your company’s current financial situation and determine how likely you are to repay them if they lend money to you. Your company’s credit score is an indication of how well it has managed its finances in the past and indicates whether or not they’re likely to be able to pay back any new debtors. A good credit score tells lenders that you’re responsible with money—and that means they’ll offer lower interest rates on their loans than they would if they didn’t trust that their money will be repaid on time.
In order for businesses who don’t have much cash flow (like startups) but want operating capital despite having poor credit scores consider taking out an unsecured business line of credit instead; unlike secured personal loans which involve collateralization like house deeds or cars before receiving funds from creditors, these require no collateral whatsoever! This makes them extremely affordable compared with other types when considering risk assessment criteria such as risk tolerance threshold setting limits based upon available funds.”
The second factor to consider is whether you have the cash flow to support your investment.
The second factor to consider is whether you have the cash flow to support your investment. Cash flow is the amount of money you have coming in and going out, and it’s important because it determines if you can afford to pay back a loan. If you don’t have enough cash flow, it may be hard to pay back loans.
The third factor to consider is whether the investment will lead to increased revenue.
The third factor to consider is whether the investment will lead to increased revenue.
This is where you need to be able to answer: Will this loan help us increase sales or gain new customers? If so, how?
If you’re looking into taking out a loan for a brick-and-mortar retail location, it’s important that your business plan includes projections of how many new customers will come through the door as a result of the investment.
The fourth factor to consider is whether the loan can be paid back quickly.
The fourth factor to consider is whether the loan can be paid back quickly. It’s tempting to take on a large loan when you have an opportunity, but if you don’t have immediate plans for how you will pay it back, then it may not be worth company borrow the money at all. If your company needs capital and can repay the loan within three years, this will save you money in interest payments over time. If your business cannot afford its debt obligations without taking out another loan within that time frame, then it should not borrow money until its financial situation improves.
Four things to think about when considering a new loan
When you’re considering a new loan, it’s important to consider these four factors:
- Your credit history. How many loans do you already have? Are they all current and up-to-date? Will an additional loan affect your credit rating negatively?
- Cash flow. What is your cash flow like on an annual basis, and how much do you anticipate increasing or decreasing it in the near future (i.e., within the next 12 months)? A higher cash flow means that more money will be available to pay back loans each month; however, if there’s too much debt already built up against this number (as could be the case with small businesses), then it may be difficult for them to get approved for any new loans at all until such time as their cash flow increases by some significant amount.
- Increased revenue due to taking out this specific type of loan — whether from better equipment or other capital investments — versus what would be lost through paying interest rates over time while still trying something different instead (like starting an online store). This factor can sometimes work both ways depending on what type of business is being considered—for example: If someone wants a franchise but doesn’t want any upfront costs associated with getting started then perhaps leasing might make sense instead? On another hand though maybe buying equipment outright would allow him/herself achieve his goal sooner rather than later without having spent time researching options first which could end up costing even more money down the road.”
Conclusion
We hope this article has helped you understand the factors that go into deciding whether or not to take out a loan. If you have any questions about whether or not your company is a good candidate for a loan, please contact us today!
