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While it’s not uncommon for new business start-ups to find it necessary to borrow money, taking out a loan is not always a good idea. The money may help you get things up and running, but you may find it difficult to pay back when your loan comes due. That said, there are good reasons for borrowing money and, if you know what these reasons are, you can feel confident in knowing that you’re taking out a loan for the right reasons. Here are four questions to ask yourself when trying to determine if borrowing money is a smart move:
1. Is My Company Turning a Profit?
If your company is already turning a profit, borrowing money from a financial lender is probably a safe move. In fact, you’re more likely to get accepted for financing if you can show the bank that you are on the path to success. If, on the other hand, your company is slowly sinking, taking out a loan to help get your head above water is never a good idea.
2. Can I Make Monthly Payments with My Current Cash Flow?
Before you take out a loan, you must stop to consider whether you can reasonably afford monthly payments if your financial situation remains stagnant. If you can use private sources of income to make your loan payments, taking out a loan is less risky. If you’re counting on the money from the loan to boost your sales and you’re counting on future profits to enable you to repay your loan, borrowing money is a risky move.
3. Will Borrowing Result in More Profit?
Many small business owners tell themselves that the only way they’ll see a profit is if they invest more money into their company. Unfortunately for many owners, this is rarely the case. For instance, if you want to borrow money to buy a new lawn mower for your landscaping
business, there’s little chance that the new machinery is going to be the thing that turns your business into a success.
4. Will a Loan Help Me Enhance Customer Experience?
If a loan will help you to enhance your customer’s experience with your company, it’s typically a good idea to take the cash. If borrowing the money will give you the funds that you need to provide an extra service or make your current product line better, taking out a small-business loan can be a great idea as it will eventually lead to a greater amount of profit.
5. Have I Exhausted All Other Sources?
Before you apply to borrow funds from a financial institution, ask yourself if you have any other avenues of financing. Have you asked friends and family to invest in your business? Have you considered taking on a partner? Do you have private income that you could invest into your company? If you have exhausted all other avenues of possible financing, taking out a small business loan may be a good idea.
By considering the questions above, you will be better able to decide if now is the right time for your business to take on debt. If you do decide to apply for a traditional loan and are turned down, you may want to consider applying for a secured loan. You should be
aware, though, that secured loans are not without risk and should only be taken when you are 100 percent sure that you can make your monthly payments.
About the Author
Vince Daines is a guest writer for where you can find out more about net loans.