Do I Really Need That Business Loan?31st August 2016
“William” owns a small company which runs hunting, climbing and fishing trips in Scotland.
It’s still early days, but so far things are going pretty well. The trouble is, his business is very seasonal and sometimes cash is tight.
What are his options?
Like many business owners, “William” assumes that he’ll have to take out a bank loan. After all, he knows his business will come back – he just needs the cash-flow to survive this difficult time.
But in reality, a bank loan wouldn’t be appropriate in this (fictional) scenario, nor would he get one.
A bank loan is something that every business owner should think about very carefully.
Yes, a loan provides much needed capital, but it also comes with risk and cost.
There’s the chance you might struggle to make repayments, and land your business in serious trouble. Interest rates can be a drag on your business when the money does come in; your loan can end up being very expensive. There’s also the difficulty involved in securing a loan. They’re not given so easily nowadays, and it will take a lot of time and effort on your part to arrange.
Reality is that loans have weakened, or destroyed, many a business – and you should think long and hard before you take one.
So in what scenarios should you apply for a bank loan? And when might you be granted one?
Here are some key considerations:
- Are your needs short- or long-term? Do you need the money for something which will have a long-term impact on your business – namely something which can help it grow and thrive?
If so a loan might well be a good idea. However, if like “William” you only need it for the next few months to cover a short-term gap, it’s not worth the risk, nor will you want to pay the interest over the long-term. You’d be better off with an overdraft.
The rule of thumb is: Get long-term funding for long-term needs, and short-term funding for short-term needs.
- Are the costs justified? You must always make a business case for a loan, but the first person you must convince is yourself. You need to prove that you have a really good reason for taking on so much risk and paying so much interest. For example, let’s say you’re investing in equipment. Is the benefit it will give your business enough to justify the expense? If you can make the case to yourself, you’ll have a better chance of making the case to a lender – and getting a more favourable deal.
- What if the worst happens? You know the old saying: Plan for the worst, hope for the best. What happens if – for some reason – you can’t pay it back? You’ll be asked for security or collateral – think about whether this is something you can afford to lose. Sometimes the lender will ask for the equipment you’re buying, but some people will make a personal guarantee against another asset such as their home. Think long and hard before you do this.
These are just three short questions to ask yourself before you make any further commitments. There are many alternatives to loans – and I’ll explore those in my next blog.
In the meanwhile, if you want your business to grow fast, but need help finding the money to do so, let’s talk. There may be plenty of options you’ve never even considered.