4 things to consider before borrowing money for your business

Whether you want to fund an expansion, buy new stock or garner some funds to take on new staff, sometimes a loan is the only way to achieve this.

Many people fear debt but as the old adage goes, sometimes you have to spend money to make money. Indeed, there is a difference between borrowing money to increase the productivity of your company and borrowing money to blow on liabilities or impulse buys. However, even if you intend to use borrowed money wisely, there are a few things you need to consider.

1. Is there anywhere else you can get the money?

Before committing to a loan, it is worth going through your books with a fine tooth comb. See if there is anywhere you can cut costs.

  • Could you use a cheaper supplier for your stock?
  • Do you have any old or no longer used equipment that you could sell?
  • Could you do any work that is currently outsourced yourself?
  • Or get your staff to do some more work for a slight pay increase?

You might be surprised how much money you can save simply by cutting back a few of your costs.

2. Will you still have enough to make the repayments if an unexpected bill comes up?

If you go through your business’ income and expenditure then you might have enough money to pay off a loan and a little bit left over but would this cover you in the event of an unexpected bill?

Even if you have proper insurance cover, you can still be hit by a nasty surprise so it is important to take this into consideration before taking out a loan. It is wise to have some money set aside in case this does happen so that you don’t have to get in more debt to cover it.

3. How is your credit?

If you don’t have good credit then you might find that traditional lenders reject your application for a loan so it is worth checking your credit record in advance and clearing up any discrepancies before applying. However, if this is not possible then you might be better off asking friends or family to help you out?

Even if they can’t afford to lend you any money, they might be able to help you get a guarantor loan. Business loans are for people with bad or no credit. Your friend or family money will guarantee they will cover the repayments if you can’t so it gives the loan company reassurance and it helps you get the funds you need and build your credit at the same time.

4. Will the loan give you a good enough return?

When spending money on your business it is important to ensure that it will give you a good return. When it is borrowed money this is even more important as you will be paying interest on it. As such, it is worth looking at how much money you will expect to make by investing the money in your business.

In order for it to be worthwhile, it must exceed the cost of the repayments and interest or it is just not worth doing. Do your due diligence so you can make an informed and wise decision.

See also: SMEs don’t understand personal guarantee in business loans

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the Smallbusiness.co.uk and Growthbusiness.co.uk titles before moving on to be a Digital Technology reporter for the Express.co.uk.

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