Taking a loan is an inevitable part of every business. A business loan, SME finance or business finance will help you expand into new ventures, purchase high-tech equipment that will bring in millions, take advantage of a lucrative business opportunity, and ultimately help you grow your business.
Before you take out a loan, have a reasonable assurance that you will not default on your loan. Even if you do, try to avoid delinquencies by having a plan B on how you will repay your loan. Always take secured loans as the collateral provides a good fallback if your plans do not go as expected. Remember, even the best businesses take out loans intending to pay them back, but there is no knowing when you can hit a cash block. When taking a business loan, it is, however, important to move with caution. Below are five scenarios where you must not take a loan.
1. When you already have other debts
Adding on an extra debt burden to your portfolio is always a bad idea. If you have maxed out your credit cards, you should be finding ways to set yourself free from debt instead of getting into more debt. Having too much debt may be a sign of poor financial management and could even cause your loan request to fail. Moreover, trying to keep up with all the loan repayments may put a strain on your business and cause it to fail. The deal gets even riskier if you are using one if your business assets as collateral for the loan.
2. To implement a new business idea before you do thorough market research
Market research helps you to validate your idea before launching it into the market. Research may cost you money and time, but it is worth it if you are going to pour in thousands or millions of dollars into a new venture. Even if you want to buy a franchise or copy an already existing business idea, it is crucial to carry out some background checks as to how those businesses are doing and the challenges they may be facing before you jump in. Be sure that your business will work out at least to a considerable percentage.
3. To make an expensive impulsive purchase
Impulse purchases are never a good idea, even in business. Rushing off to buy the newest technology, create a remodel, or perform an upgrade is not a wise move. You also need a lot of research into this, not to mention educating your employees and customers about it. Remember, people are naturally resistant to change, so any changes you intend to make have to be gradual and strategic. Moreover, even if the asset does bring extra profits, of what use is the income if you are using it to pay the expensive loan?
4. When you didn’t intend to until you heard about some unbeatable interest rates
One rule of loans is that you should never get into debt without a proper agenda and a solid repayment plan. Do not react to an advert offering you ‘too good to be true’ rates. Even if the offeror has no hidden agenda, do not take a loan just because you can.
5. Do not take a loan before checking the three conditions below
Every business is unique, and a loan option that works for you may not cut it for another business. Below are some things to consider.
• Your best financing option in terms of amount and type of interest rate (fixed or variable), how often you will be making payments, and so on.
• How much you require, which means you will have to sit down and make your calculations. Overestimation may mean you get to pay more interest so be careful about that.
• How much effort you will need to get the loan in terms of application, getting the right documentation, and the waiting period. If the logistics of getting a loan means that you are spending considerable time away from your business, come up with ways to cover for that.
Last but not least, it goes without saying that you should check your personal and business credit scores first to see if you qualify for a loan in the first place.
