Why Some Businesses May Want to Avoid a Business Loan

| September 12, 2013 | 0 Comments

Business loan

There are times when a business needs an injection of capital to get started, or to fuel growth. There are several options available to those needing to finance business costs, such as business credit cards, vendor accounts, lines of credit, and of course, business loans.

Business loans are a very popular and effective way of securing business financing. The interest rates are generally reasonable, the terms are flexible, and once the loan is paid off, the obligation to the lender is fulfilled. However, there are times when taking out a business loan may not be the best approach to acquiring capital.

 

Business Loans for Startups

Many budding entrepreneurs start looking for business loans before the enterprise has been fully planned out, or before they’ve had a chance to prove the viability of the business model. Some of these businesses go on to be very successful; unfortunately, many of them do not.

 

Starting out Underwater

If a business loan is taken out too early, business owners may find themselves unable to make the payments. Sometimes it takes more time than anticipated to make that first big sale, and the brilliant social marketing campaign may not bring in as many customers as was previously thought.

Regardless, the payments on the loan still have to be made. This can become an untenable situation for many new business owners. They may find themselves unprepared when that first payment comes due, if everything doesn’t go exactly as planned.

It’s a much smarter idea to start small, and to give the business a chance to prove itself, before getting a business loan. Then, match the loan amount to the business’s ability to repay it.

Or if cash flow is a must, then seek out other investors who may believe in the business idea, and consider taking on a partner in order to acquire cash for the business.

Risking Too Much

Owners of new businesses are likely to find that potential lenders will require a certain degree of security for their investments. It makes perfect sense from a business standpoint. Very few investors would be willing to sink money into a business venture that required an unacceptable degree of risk.

The security that lenders want from new businesses with limited credit history usually comes in the form of collateral, or personal guarantees. Both of these methods of securing financing basically mean that the business owner’s personal assets are on the line, should the business default on its debts.

Because their personal assets are at stake, owners of new businesses would be wise to carefully weigh the risks involved when taking out a business loan. A carefully considered business plan should be in place, including establishing your business’s credit, before taking on large amounts of business debt. If possible, business loans should be taken out only when a business venture has already proven its viability.

Delaying the Inevitable

Business loans should never be taken out to prolong the life of a failing company. If financing can even be found for such a venture, it will only delay the inevitable slide into failure, and heap unnecessary debt onto the shoulders of the owners. Loans should never be taken out to pay past-due obligations. In cases like these, it may simply be best to cut one’s losses, and head back to the drawing board.

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Category: Commercial Loans

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