People have a lot of opinions when it comes to debt and borrowing. At one extreme, some believe that all debt should be avoided and there’s no room for argument on the subject. Others perhaps borrow a little too freely, taking out new financing with little thought about whether doing so will be a benefit or a hindrance in the long term.
As a business owner, it’s dangerous to take either of these positions. Naturally, borrowing money too aggressively and without enough forethought could come back to haunt you. On the other hand, if you refuse to take on debt out of principle, you could cheat your company out of opportunities to profit and grow.
The trick, of course, is to find the middle ground. While you shouldn’t borrow irresponsibly, strategic borrowing for the right reasons could be worth the risk and the cost in the long run.
Here are 5 reasons why your business might decide to borrow money now (and 2 reasons why your business might want to wait).
Reasons to Borrow Now
1. You Need Equipment or Inventory
Have you ever heard that it takes money to make money? There can be lot of truth to that statement – especially where your business is concerned.
Depending upon the type of industry, your company many need specific equipment or inventory to make money. Unfortunately, covering those upfront costs out of pocket can be a challenge. A business loan can help you to acquire (or upgrade) the equipment and inventory your company needs to stay relevant and ahead of the competition.
#2: You Want to Expand
Deciding to expand can be an exciting part of any business’ journey. Of course, opening new locations, hiring additional team members, or launching new web-based products typically requires an upfront investment.
Many business owners borrow to help make these types of transitions easier to execute and manage.
#3: The Potential Profit Outweighs the Investment
Unfortunately, you probably don’t have a crystal ball tucked away inside one of your desk drawers. Instead, you’ll have to rely on research, your experience, and advice to decide whether an investment opportunity is outweighs the costs and risks of borrowing.
If your research (and your gut) tells you that the potential profit from an investment outweighs the risks, borrowing money to take advantage of an opportunity might pay off for you and your company in big ways.
#4: You Receive a Large Tax Bill
Depending upon your type of business, your company may be required pay state and federal taxes in smaller increments throughout the year. Yet sometimes things can go wrong, and your business might find itself faced with a high tax bill from the federal government.
The truth is that it may be cheaper to finance your debt through a lender versus paying interest and penalties to the IRS when your business owes an outstanding tax obligation. Additionally, by borrowing money to pay your tax obligation, you might be able to avoid having a tax lien placed against your company (and hurting your business credit in the process).
#5: You Can Refinance and Save Money
Does your company already owe high-interest debts on credit cards or loans? If so, consolidating those debts into a new, lower-interest account might save you a bundle.
When your credit improves or better financing options become available for other reasons, it can make sense to take out a new loan if the rates and terms will save you money.
When to Wait
Depending on your personality, taking a chance to grow your company may be either exciting or terrifying. Yet regardless of whether you’re a natural-born risk taker or a slow-and-steady style business owner, there are a few warning signs that taking on business debt might not be the best fit right now.
- You have credit problems.
Having bad credit doesn’t mean that you can’t borrow money. There are lenders with products designed for people with less-than-stellar credit. Unfortunately, those bad credit business financing options are typically more expensive.
If you have bad credit, you might be better off waiting to borrow money for your business. By working hard to improve your credit first, there’s a chance you could secure a more affordable loan for your company with better interest rates and terms in the future.
- You’re overextended financially.
Is your business struggling to make ends meet? If so, you should exercise caution before taking on any new debt.
There may be times when it makes sense to borrow money anyway, especially if you anticipate a financial improvement or seasonal income boost. Just make sure to consider the risks before you sign on the dotted line, especially if a personal guarantee is required to secure financing.
Where to Borrow
Before you apply for business financing, you should always weigh the risks and make sure borrowing is the right choice for your company. (It’s also helpful to review your credit reports in advance – both business and personal.)
Remember, caution is warranted, but too much caution could cost your company an opportunity to grow. The most thriving businesses typically have owners and leaders who have learned how to navigate this territory of risk versus reward successfully.
If you’ve decided that you are ready to borrow, the next step is finding the right type of business financing. There are over 44 types to choose from, so the process of picking the best type of financing for your company can be a little tough to navigate. Here’s a guide from Nav to help you review your options.
Finally, once you’ve been approved and received the funding you need for your company, remember that your job isn’t even close to over. You need to manage your business accounts well so that you’ll be able to build your business credit and borrow again, perhaps under even better terms, in the future.
This article was originally written on April 3, 2019.
Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.
Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.