Funding has always been one of the most pressing challenges that small and medium-sized enterprises (SMEs) face. Unlike large companies, most SMEs only have enough capital and resources to keep day-to-day operations afloat, particularly if they’re still in their early stages. This limitation can easily hamper a business’s growth, considering the lack of extra funding that could be used for expansion ventures such as buying new equipment or adding new products and services.
In such cases, taking out a business loan is one option an SME can explore to cover the funding they need for essential operations and more. It’s a good thing that there are more choices available, as well as more convenient processes for loan applications, through digital business banks. Unlike traditional banks, which often take much longer to process loan applications for their corporate clients, digital banks can approve loans within minutes while also offering high loan amounts and favorable interest rates. The Philippines’ Maya Business, for instance, offers the Maya Flexi Loan solution, which can provide a loan amount of up to PHP 2 million with the most borrower-friendly fees. Small businesses based in the country can get the funding they need without having to prepare heaps of documents and collateral just for the sake of getting approved.
But if you’re running a small business and looking for ways to grow, then you might be weighing the additional concern of whether taking out a business loan just right now could be the right move to meet your goals. Is there ever a “right” time to borrow money for your business, and if there is, what makes it so? Here are some things to consider first about your business to help you decide:
1) Your Current Financial Stability
Before taking out a loan, consider first the current financial situation of your business. Are you making enough revenue to cover potential loan repayments on top of expenses? If you’re sure that you have a steady enough cash flow before you apply for a loan, you’ll worry less about the additional financial obligation of loan repayments severely impacting your daily operations.
Conversely, if you’re currently weathering through heavy cash flow fluctuations—perhaps during a low season or a major business transition—then it might not be the right time to apply for a loan just yet. Wait until your finances stabilize first so that your business will be in a better position to address its repayment obligations.
2) The Purpose of the Loan
Having a clear purpose for your business loan at this particular juncture of your entrepreneurial journey is a must as well. Rather than naming a generic purpose such as “for business expansion,” try to be more specific regarding how exactly the money will be used.
Your purpose could pertain to buying certain equipment that can help increase production or hiring new staff to serve more customers over peak season. Being able to outline a detailed purpose can determine whether it’s the right time to take out a loan or if you need more time to ponder over your goals first.
Ideally, the purpose of your loan should be for growth-oriented goals and not daily expenses. If your initial purpose leans towards the latter, then it might be a sign of an underlying cash flow issue that you should address first before taking out a loan.
3) Your Ability to Meet Loan Terms
Next, carefully review the terms that come with any loan you apply for. This includes repayment schedules, interest rates, and other conditions, as these will affect your business’s finances over the loan’s term duration.
If the terms aren’t suited to your business’s current financial situation, then it might not be the right time just yet to obtain a loan. You can also try looking beyond your initial options for other lenders with terms that suit your business’s situation more, such as loans with lower interest rates, to make sure your business can take on monthly repayments for these with ease.
4) The Return on Investment Potential
Another important factor to consider before taking out a business loan is the potential return on investment (ROI) it can offer. If you believe your project can bring in significant ROI for your business, such as increased revenues or much lower operational costs than before, then it may be the right time to take out a loan to help fund it so that you can enjoy those returns as soon as possible.
To determine ROI, calculate expected profits from the investment and compare it to the total loan cost, including interest. Consider other unquantifiable factors as well, such as added convenience for your staff or improved safety in the workplace.
5) Your Current Debt Load
Does your business have any other outstanding debts? If the answer is yes, then you’ll need to assess first whether you can add loan repayments on top of those obligations without affecting your cash flow. Consider using the debt-to-equity ratio to help you determine your business’s capacity to make repayments should you take on a new loan.
A high ratio could mean that additional debt will only strain your resources, while a lower ratio might indicate that your business can handle the additional loan. Overall, if you’re struggling to make repayments to your other debts as it is, then it might simply not be the right time to take out another business loan.
6) The Market and Economic Conditions
Lastly, take a good look at the current market and economic conditions as well before borrowing. If the industry your business belongs to is going through uncertain times—for instance, perhaps customers are spending less—then it might not be the best time to take on another financial obligation.
In addition, loan interest rates can also fluctuate according to economic conditions. That means that borrowing at a more stable time could lead to better terms for you.
In truth, there are many things to consider first to determine whether it’s the “right” time to take out a loan, some of which include your business’s financial situation, cash flow, business goals, and market conditions. Hence, before you submit that loan application, do take into account the factors discussed above first, all so that you can make sure that borrowing the money won’t have any negative impact on your business in the long run.
