Should I take out a loan for my small business?

Is a loan the right funding solution for your small business?

 

If you’re thinking of taking out a loan for your small business you’re probably facing one of a few common problems encountered by small business owners. Let’s look at what these are and what the possible solutions are.

Problem #1 – Insufficient working capital.

Working capital is a fancy way of saying “cash needed to run your business” and nothing gets the blood pumping quite like running out of the cash you need to keep the lights on and wages paid. It’s precisely because this can be such a stressful situation that business owners might make a knee-jerk decision and take out a loan to cover the shortfall. I’d encourage you, if you find yourself in this situation, to stop for a second and ask yourself why you’ve run out of cash.

  • Is there something fundamentally wrong with your business model?
  • Are you charging enough for your services?
  • Is someone stealing from you?
  • Are you paying too much for rent/suppliers/contractors?
  • Are your staff hitting targets and generating the right level of return for your wage spend?

If you’re not able to get to the root of what is causing your cashflow woes you’re likely to find yourself back in the pain cave before too long, but this time you’ll have the extra pressure of funding the repayments on your new loan. Use the cash flow drama as motivation to get to the cause of what is going on, so you can clearly articulate why you want to take out the loan before you speak with any lenders.

Problem #2 – Expansion plans.

Growth can be expensive, no doubt about it. If you’re wanting to grow your business beyond what it is organically capable of then taking out a loan can be a good way of funding that growth. Before you speak with your bank manager (is that even a thing anymore?) make sure you’ve got carefully laid out plans for how you’ll spend the money and what kind of results you’re expecting to get. If you’re going to accept the risk that comes with taking out a loan (small business loans are commonly secured against the family home) then you want to make sure you’ve got great plans for what the money is going to be used on as well as clear markers for success, so you know if things are going to plan.

Problem #3 – Buy out a business partner.

We’ve written before about why you should be really careful when getting into business with someone (they are called work-wife/husband for a reason!), but assuming things went sour anyway you’ll likely want to get your partner out of the business, so you can get on with things solo.

First question to ask yourself is – is my business actually worth anything? This can be hard to be objective about, so it might be worth getting independent advice on this one. Too often people get emotionally attached to a business and end up paying far more than it’s worth just to get a business partner out of the equation. Consider the following questions:

  • Could you restart this business for less than what you’re needing to pay your partner?
  • What exactly are you buying?
  • Is your ex-partner allowed to start up in competition to you and steal all your, previously mutual, clients?

 

If you’re seeing a common theme here it is this, stop and think before taking out a loan. Ask yourself why you really need the money and see if there is an alternative because once the money is spent there’s no going back.

As for where you get the money from there are a bunch of options out there these days. Traditional banks tend to be a bit rubbish for us SME folk, but they are generally a good first stop before trying the non-traditional online lenders (Valiant Finance is a great search tool for comparing a wide range of lenders quickly). Another option is friends and family, but you want to be careful here – family meals are going to get awkward fast if you’re not able to make your repayments.

If you’re thinking about taking on funding for your business, but want a second opinion on whether that is really the best option for you why not get in touch? We’d love to help.