Many business owners face different challenges when applying for business loans. Sometimes, the biggest hurdle is deciding whether or not to go for it. It’s okay to be cautious and take the time to contemplate. After all, rushing into any financing decision without thorough planning can be a risky move. This guide helps you determine the best time to get a business loan. A thoughtful approach toward seeking financial aid increases your odds of getting your application approved and helps you manage your financing effectively.
Taking out a loan is a huge step—something business owners shouldn't take lightly. When deciding to apply for a loan, you need to do some in-depth financial planning and analysis to understand how much financing you require. The next step is to figure out when you'll be ready to get a loan.
Applying for a business loan too soon can put your business at a disadvantage. Many new businesses typically have their applications denied due to insufficient cash flow. Worse still, some resort to predatory loans and end up paying off exorbitant interest. That said, seeking financial help a bit too late can be similarly detrimental to your business.
One of the common mistakes that many business owners make is utilising personal finances and business revenues to finance expansion projects. This can put too much financial pressure on growing businesses. Consequently, when they struggle to make ends meet, they may need to borrow money to keep the business afloat. Requiring urgent financial support is often a red flag to lenders, potentially indicating poor financial planning.
While navigating the world of business loans can be daunting, you shouldn't let the fear of debt inhibit your business. An impartial business loan can be the fuel your company needs to facilitate growth and improve its value. Several factors indicate whether a business loan is your best option.
GROWING A BUSINESS
Expansion is a great reason to apply for a business loan. Diversifying your product line, for example, can help you attract new customers and boost sales. That said, the expansion will undoubtedly put pressure on your existing resources, and it's essential to plan for major changes. According to research, the costs of launching a new product and opening a new branch will likely be greater than the cost of manufacturing the product alone.
With added tax implications and marketing costs, relying on your working capital can easily jeopardise your cash flow. That's why you should consider taking out the loan before expansion. This helps prepare your business for future growth and the financial needs that come with it. Note that applying for a business loan can be a time-consuming process, so you'll want to seek assistance as soon as you settle on a plan to expand your business. Once you bring your expansion projects to life and start generating more revenue, repaying your loan is less likely to become a financial burden.
At Kriya, we provide various business loan options to suit your business’s needs—giving you the financial freedom you need to realise your goals and fund your investments.
Every industry has a busy season, which can be a great opportunity to embark on a financing journey. By leveraging business loans, you can respond to a dramatic increase in demand for your products or services throughout the busiest periods more efficiently. Most importantly, you can make the most of the peak season with some extra money to invest in your business and cover increasing operational costs. A great return means you can pay back the loans in full without worrying about maintaining a good cash flow and improving the overall economic health of your company.
Not sure where to start? Get financial planning advice from our top advisors at Kriya to compare financing options and gain deeper insight into your business goals.
Securing cash assistance during slow seasons is just as important as during your peak season—every business experiences downs at some point in its operations. To maintain a healthy cash flow, it may be a good idea to take advantage of your available business loan options to survive periods of reduced demand.
Financing helps ensure that your company can keep up with its day to day operations when sales decrease. You can put your loan to good use during the off-season by making improvements to your business. Alternatively, a loan can help you diversify the products and services you offer.
Coastal hoteliers, for example, perhaps most understand the impact of seasonality on a business. Slow seasons like winter and rainy days can affect hotel occupancy, especially if the operating margin is already close to threadbare. Any significant decline in booking and returns can spell disaster if cash flow problems are not appropriately addressed.
BUILDING BUSINESS CREDIT
Having a solid credit score is vital for both startups and growing businesses. Not only does it give you access to better financing packages with much lower interest rates, but it's also a great tool to obtain future investment opportunities for your business. To improve your company's credit score, you need to build up your borrowing history, which means taking out a loan as a first step.
If your company is mature enough—preferably at least three years old and above—and has smooth cash flow, then you may have a shot at securing an affordable business loan. Once you acquire your first loan and pay it back in full, you can gradually work your way up to better financing options until you create an appealing credit history.
However, it’s worth noting the best time to apply for a loan is when you’re not in a state of emergency. It is often easier to get approved for a top tier loan when your company is in good financial standing. If credit score-building is your primary reason for acquiring a business loan, be sure to have adequate funds to service the debt.
WHEN TO DELAY GETTING A BUSINESS LOAN?
Aside from the “green light” scenarios presented above, you should also know when it’s the wrong time to seek financing. Business loans are, no doubt, instrumental for a company’s growth. However, there are certain conditions in which businesses may not be ready to apply for a loan.
Additionally, businesses with poor credit scores may need to reconsider their financing plans until they are ready to pay off their previous loan balances and manage their cash flows effectively. Bad credit history is a significant factor in business loan approval. Even if you qualify with a poor credit score, your chances of acquiring a loan with lower interest rates are slim.
Also, if you're not confident that your business can pay what it owes, then a loan may not be a solution. Your business plan should have clear financial projections describing how well your business can utilise the loan and how your timeline of execution and earning aligns with your loan’s term. Otherwise, your expansion projects will pay for your loan.
All in all, deciding whether or not "it's time" to apply for a loan isn't as challenging as it may initially seem. When you have a thorough understanding of your business goals, as well as your current financial position, then you are well on your way to establishing whether you need a loan and can comfortably pay it back. Remember, it's best to use your loan to make strategic investments that will yield significant returns and overall success in the future. You'll never know the best time to take out a loan until you're sure that it is the right call.
FREQUENTLY ASKED QUESTIONS (FAQS)
What is a business loan?
A business loan is a type of loan that is taken out from a lender for business purposes. It has the same premise as other types of loans. This involves applying for a business loan, getting declined or approved, and repaying the debt with or without an added interest, depending on the lender’s terms and conditions.
Why should you consider a business loan?
A business loan, when used efficiently, can provide great assistance to small or large-scale businesses. Seeking financial help is essential for businesses looking to expand, purchase additional inventories to achieve more sales, update products and services and create an excellent credit history.
How do you qualify for a business loan?
Typically, there are four main requirements to meet to get approved for a business loan. These include good credit scores for both the company and its owner. For businesses, excellent credit scores are 80 and above. For business owners, personal credit scores beyond 750 are ideal. Additionally, the company needs to present accurate monthly financial statements, collaterals, updated business plans and other supporting documents.
How long can you take a business loan?
While it depends on the lender and your repayment terms, business loans may usually extend up to 10 years or longer. However, you must have an authorised business with a good cash flow and credit score to qualify for such loans.
What types of business loans do you offer?
Kriya is the best place to acquire a flex loan, invoice finance and recovery loan scheme (RLS). With a flex loan, you'll have access to a credit line, which you can repeatedly borrow and pay off within a specific timeframe. Invoice financing lets you borrow money to compensate for the amounts due from your customers. As the term suggests, RLS offers assistance to businesses recovering from a reasonable financial crisis, such as the COVID-19 pandemic.
Can you get a business loan after bankruptcy?
Once your business declares bankruptcy, it will remain on your credit report for up to ten years. During those years, it will be difficult for your business to obtain financing. While your chances may be low, it’s still possible to qualify for a small business loan after bankruptcy. This is provided that you have collateral, a reasonable cause of bankruptcy and bank statements showing that your cash flow has improved over time.
Is it ideal to get a loan to start a business?
Startup loans may help cover operational expenses to get your business off the ground. However, you need to ensure you have a solid personal credit score, a killer business plan and enough collateral to demonstrate a low credit risk and qualify for such loans.
Want to learn more about Kriya and the services we offer? Visit our page today; our lines are always open to address your inquiries and concerns regarding business loans.