Running a small business is never easy, you must take care of your customers, manage your suppliers, and keep the finances in order. While this can be too much, the reason many people start their own business is that they see it as a way to achieve financial freedom.
But what if your business is running short on cash? While many people think this could be due to a slowdown, there are other scenarios when you might not have enough cash to achieve your goals. This could include taking on a new customer, securing extra working capital, or even trying to purchase equipment that could help your company in the long run.
Either way, there are times when you might need to turn to outside funding to help your business. Granted, going into debt isn’t always the best strategy when you are trying to achieve financial freedom, but there are times when credit can help you to reach your dreams.
With that in mind, here are some tips on how to use a loan to help, not hurt, your business.
- Don’t Apply for Too Many Loans
When your first starting out it might seem like your business never has enough cash. This can create a sense of panic, leading you to apply for every loan on offer. However, this is exactly the opposite of what you want to do. Not only will it hurt your credit score, but what will happen if you are approved?
The best way to approach getting a loan for your business is to check out the qualification requirements of the lenders you are considering. From there you can compare the terms and conditions and decide which loan is the right fit for you.
Even if your lender of choice is offering automated business loan applications and quick approvals you still want to have an understanding of how you will have to repay the money. This is not to say that getting a loan fast is not a good idea, rather you want to know as much as you can about the terms and conditions tied to the loan before you decide to take the money.
- Have a Plan
You only have one chance to spend a dollar. As such, you want to make sure that you have a plan for every loan you get – not only how you will spend the money, but also how you will repay it.
This is important. While debt can be a tool to help grow your business. Getting stuck in debt will stand as an impediment to attaining financial independence. As such, have a plan to service the loan, including what will happen if your business goes through a tough patch.
Only in this way can you determine if this loan is the right thing for you. Sure, the money might help, but if you cannot repay the loan, then there are probably a few other things you need to do to secure the future of your business.
- A Line of Credit Might be a Better Option
It might sound counterintuitive but there are times when credit can help you to reach your goal of reaching financial independence. As mentioned, this doesn’t happen by accident as you will need to have a plan not only for how you plan to spend the money but also how you will repay the funds.
One other thing to consider is whether to get a line of credit or a loan. While qualifying for a credit line might be more difficult, having one allows you the option to tap into a revolving pool of funds that you can use on a strategic basis to help your business grow.
Contrast this with a loan, where you receive the funds up front and then must make regular payments. While you don’t need to repay a line of credit if you are not using it. In this way, a line is similar to a credit card for your business, though the interest rate tends to be lower and if you can manage your cash flow, then a line can be used as a temporary float if and when needed to finance your business.
- Don’t Get Stuck in a Debt Trap
Loans and credit lines are not free money – they will need to be repaid. As such, you always want to mindful of what you are doing when you consider using credit to finance your business.
Don’t get stuck in a debt trap by thinking you can always get another loan to repay the first loan. Instead, be strategic in how you use loans to help your business as this is the only way you can reach financial independence.