When should you finance your business with a loan?

InvestmentWhen you want to finance a business, there are different ways to get funds. Getting a loan is one of the basic ways to finance a business. Other ways are equity and convertible debt.  There are other ways as well to finance a business. This includes personal investments; reward based fundraising, bootstrapping and seeking help from friends and family. Each method has its own advantages and fits better to some of the situations than the others.

Getting a loan is the easiest way to get funds for a business than equity and getting a convertible debt. If you qualify, you will get borrow an amount of money then pay it back at a later date with established interest rate.

What to consider before getting a loan

Before you decide to fund your business with a loan, it is essential to consider the following factors;

  • Industry, stage and size of the business
  • Amount you intend to raise
  • The way you plan to use it
  • Short and long term goals for the business

When you make a decision to go for a loan also called debt based fundraising, you must have a meeting with your lender to discuss terms of the loan and rate of interest that comes with repayment of the loan that you will receive. You can also provide expected time frame within which you can repay the loans.

 

Interest rate

Loan is the most common form for getting outside capital to start new business. Venture capitalists and angle investors appear in big headlines when they fund well performing companies. However, it is debt providers who are behind most of investment money that goes into funding most of businesses that do not get a mention on business magazine covers and websites.

Collateral

Collateral is one of the important pieces for a loan.  Apart from the investment plan that convinces lenders about viability of your project, it is the core thing. These are some of the things that lenders will need from you before you get a loan so that they can sell them and recoup their money in case you are unable to repay the borrowed money. You have better chances of getting a large loan when you have more collateral.

For example if you want a loan to establish a business that sells office equipment, you will seek a specific amount that is suitable to buy the first set of products to sell. After establishing the interest and other loan terms, you can offer something valuable as collateral like property. You may also offer the new office equipment as part of the collateral.  Despite the assumption by many people, the banks and other loan lenders never make much profit on single loans   more so when some of them go bad.

For this reason, they only agree to a deal when they are 100% that they are not going to lose out. Lenders get this sense of security from collateral.

Getting a loan without collateral

There are many would be business people who are discouraged form acquiring a loan because they do not have collateral.   Collateral is synonymous with loans but it does not mean that it is everything. Lack of it does not fully rule out possibility of getting a loan.

If you do not have collateral and have no plans to personally sign for a loan, your options will be limited to smaller amounts mostly supported by organizations that support small businesses. The financiers or government become the consigner for your loan. Government cosigned loans might not be easy to get because it has many other obligations to meet but it may be the only entity that has the guts to bet on new ideas before implementation.

When to take a loan

Like other business funding options, there are various scenarios when a loan is the most practical option for financing the company. These are:best-way-to-invest-money (1)

When you need a small loan

Loans are better for small amount of capital. When you need a loan of less than $50,000, it does not make much sense to go for an option like giving up equity. There is less risk for entrepreneurs and investors with smaller goals than when you need large sums.

When there is quick need for capital

In business, there are times when you come across an opportunity that you will definitely miss out unless you can raise funds within very short time. It will not help to go for other funding options like equity because it consumes a lot of time. Loans tend to be processed faster providing you a better chance to get needed funds at the expected time.

When there is need for money for concrete reason

When your funding needs are in physical form, it makes more sense to get a loan. If for instance it is about a piece of real estate, you have collateral with you and it gives you the pleasure to give investors clean timelines.

When equity is not available

When you have a business, it is not always when you want to offer equity or go for convertible debt option.    An opportunity to expand the business may also rise when you are not prepared to pursue the other funding options. A loan is the right   way to go at such a time. Many entrepreneurs are reluctant to give up their equity in companies for genuine reasons therefore straightforward loan will have attractive benefit as they allow retaining of ownership and having control of the company.

When you seek a loan it is essential that you explore all your options carefully to see whatever is available and from who. It is better to have financing options but not need them rather than have a need for finances and fail to find any.