Find out when you should apply for a business loan and when you should look elsewhere for funding.
Taking out a loan is one of the many ways Australian businesses can access the funds they need to grow, consolidate or make essential improvements. But before you apply for a business loan, it’s important to be sure that a loan is the right funding option for your situation. After all, taking on additional debt can be risky for any business, so let’s look at some of the common reasons why you should consider borrowing for your business.
When a business loan can help
There are several situations where taking out a business loan might be the best solution for your business:
- If you’re just starting out. Whether you’re starting your own business from scratch or buying an existing business, there’s a reasonable chance that you will need to borrow money. The good news is that there are several business finance options available if you can’t afford to completely self-fund your business plans.
- If you need more working capital. Having adequate working capital to cover the everyday costs of running a business is crucial. A business loan can help cover short-term funding needs to help your business maintain its financial position, fund growth ambitions or cover any cash-flow shortfalls. This is where a line of credit or a business overdraft can be very beneficial.
- If your business needs more equipment. Whether you’re buying new equipment or upgrading existing equipment, you’ll often need to borrow money to access the funds you need. There are many equipment finance options available to help you buy new machinery, vehicles, IT equipment or anything else your business needs to survive and grow. In most cases, you can use the equipment you purchased as security for the loan.
- If you need to purchase more inventory. Inventory is one of the largest expenses when running a business. You need to make sure your business has adequate supplies of high-quality products in order to keep up with customer demand, but you may find that you don’t have enough capital available to fund that purchase. For example, you may not have enough money on hand if you’re in the midst of a seasonal downturn. This is where a business loan can provide the funding you need, but accurate sales projections are essential to help you work out whether your business can afford the loan costs.
- If your business needs to expand. Has your business outgrown its premises? Are you struggling to find space to fit all your staff or inventory, or is your retail store too small for the amount of foot traffic you get? While this is great news for your business, you may not have sufficient cash available to fund the expansion. If you need funds to cover the cost of relocating and expanding, a business loan could be the answer.
- If you need to hire more (or better) staff. An injection of fresh talent could make a world of difference to your business. Whether you’re increasing the size of your staff to cope with rising demand or simply hunting for more talented people to help take your business to the next level, you’ll need to have sufficient funds to cope with the rising demands on your payroll. If you need to invest in talent to increase business revenue, a business loan could provide the funds you need.
- If you need to restructure existing business debt. If your business is struggling to manage its existing debt, you may want to consider restructuring your existing debt into a new loan. By finding a better interest rate and locking in a repayment schedule that’s easier to manage, you might be able to take control of debt and get your business back in the black.
- If you want to build future credit. The fact is that most businesses will need to borrow funds at some stage of their existence. If you’re planning on applying for larger-scale financing in the years ahead, it may be worth considering your short-term business loan options now in order to build your business credit. By successfully taking out and repaying a loan, you can improve your chances of getting a larger business loan in the future.
- If you need to take advantage of a business opportunity. Sometimes opportunities arise that you just have to take, even if that means putting your business into debt. It could be a recently realised gap in the market, an opportunity to buy inventory in bulk at a discount price or any other number of potential scenarios that could result in huge business profits if you’re willing to take the risk and borrow additional funds. Just make sure you carefully weigh the benefits and drawbacks of the opportunity, including comparing the cost of the loan with the potential return on investment, before deciding whether to take the plunge.
Things to consider before applying for a loan
Just because your business is experiencing one of the scenarios above doesn’t necessarily mean that you should apply for a loan. There are several other factors to consider before deciding whether a business loan is the right option:
- The cost of the loan. How much do you need to borrow? When you take the interest rate and fees into account, what will be the total cost of the loan? Make sure you can comfortably afford the repayments before you borrow any money.
- Wants vs needs. How essential is it for your business to access additional funds? Sure, upgrading to brand-new, top-of-the-line equipment with all the bells and whistles would be nice, but is it really necessary? Will hiring new or more experienced staff really lead to a direct increase in revenue? You should carefully consider your business’s current financial situation and make sure that you only borrow to cover essential expenses, not non-essential costs.
- Types of loans available. There is an extensive variety of business loan options available in Australia, so it’s important to be certain that any loan you choose is suitable for your needs. Your accountant or business finance broker can help you make sense of your funding options.
- Other sources of funding. Make sure you consider other sources of funding available to you. For example, if you’re a sole trader starting a business, you may find that a personal loan meets your needs. Alternatively, you might be able to find funding from one or more investors.
- Seek advice. If you need help deciding whether a business loan is the right option for you, ask your accountant or business adviser for assistance. They will be able to help you understand your funding needs and advise you on the best course of action.
Finally, remember that taking your business into debt always comes with a level of risk, so make sure you’re fully aware of the implications of borrowing money before deciding to apply for a business loan.