The Ultimate Guide to Applying for a Business Loan

Are You in the Market for a Business Loan?

Business loans can have huge benefits for your company. This article explains how they work, what to consider, and when it makes sense to get one for your business.

Taking on debt is inevitable for many businesses. As with every financial move, it’s best to consider all angles before going ahead with the decision. Here’s what you need to know about business debt - when and why it might make sense to take it on.

When is it a good idea to take on business debt?

When seeking resources to help grow the business. It takes money to make money, and a small business loan can help business owners pay for an expansion when they don’t have the current resources to fund it on their own. The funds can be used to broaden the company’s line of products or services, pay for a move to a larger location, fund a marketing campaign or hire additional staff.

Before taking on debt for this purpose, it’s important for a business to first measure the anticipated return on investment (ROI) for the debt. The ROI for taking on new debt needs to exceed its post-tax interest costs for the debt to be profitable for the business. For example, if a business takes out a loan to pay for new equipment costing $10,000 that will enable it to sign a $20,000 contract, it needs to ensure that a loan won’t cost them more than $10,000 in interest and other fees. Otherwise, the business will not stand to gain from taking on new debt. The profit margin also needs to be generous enough for the venture to be worth the time and effort for the business. If the final gain is minimal, the business owner may be better off investing energy in another lower-cost endeavor.

When trying to build credit. Taking out a small loan or opening a new line of credit can be a great way to build a credit profile for a business and to strengthen its relationship with financial institutions. Small loans and lines of credit can help a business prove it is responsible and trustworthy for repaying debts. This will open the door to larger loans that may be needed in the future.

When taking on debt for this reason, it’s crucial for a business to run the numbers and make sure it can handle the monthly payments even before the anticipated boost in revenue. If a company cannot meet monthly payments, taking on new debt can end up doing more harm than good to its credit.

Why is debt often a preferred source of funds?

Businesses in need of extra cash have several options. Primarily, a business can decide to sell equity in its company, take out a small business loan, or open a new line of credit. Here’s why debt can be a preferred source of funds for businesses:

It has lower financing costs. Unlike equity, debt is limited. Once the loan is paid back, the business owner can forget it ever existed. On the flip side, selling equity in a company generally means forking over a part of the profit for as long as the business exists. (It’s important to note, though, that debt has fixed repayment costs as opposed to equity stakes, which are determined as a percentage of the company’s profit. This means a business owner will need to pay back debt regardless of the company’s success.)

 

It provides tax advantages. Business debt can decrease a company’s tax liability by lowering its equity base. As an added bonus, interest on business loans and lines of

credit are usually tax-deductible.

 

It mitigates risk. Taking on debt to access funds, instead of selling equity, lowers the company’s risk in the event that the business does not succeed.

If you’re ready to take out a business loan or to open a new line of credit for your business, we can help! Our business loans and the lines of credit feature favorable rates and easy terms. Call Education First FCU today to secure the funds you need to grow your business.