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When Is It a Good Time to Take Out a Loan?

When Is It a Good Time to Take Out a Loan?

Oftentimes, business owners wait for the “right time” to take out a loan. By right time, some entrepreneurs mean when they’re in dire need of cash and soon—which is actually too late, if you think about it.

Experts say that the best time to initiate the loan process is when you don’t need the cash urgently, and only after you’ve created a financial plan to ensure sound spending. In most cases, though, it’s not just about the timing. It’s also about your current financial standing and the type of loan you’re planning to get.

If you’re looking for financial improvement for your business, here are considerations to help you do it right.

How Timing Can Impact Your Loan

Typically, you should be able to receive your loan proceeds shortly before your target period or the date on which you actually need the money. You should have your spending plan ready and ensure that you have enough time and funds to settle your loan. This is especially true if you have other existing financial obligations.

If you take out a loan too early, you may be tempted to spend money in other endeavors and spend unnecessary time paying for it, possibly impacting your repayment capacities.

If you take out a loan too late, you might miss out on the opportunity to expand your business or maximize revenue opportunities. Worse, it might end up putting your business and personal funds in a financial strain.

business loan

When to Get a Business Loan

Below are few of the situations that signal the need for a business loan:

  • Starting a business. Depending on the type and size of your new venture, you need to infuse business capital to start a business, even if it’s a  start-up. If you have a physical store or office, you’ll need cash to pay for the space, office supplies and equipment, inventory, and the human resources. Depending on how your business fares, it may take a year or so before you receive return on your investment.
  • Opening a new site. Expanding your business and putting up a new branch requires additional costs, too, and taking out a loan may be one of the best ways to fund this business expansion activity.
  • Developing a product. Entrepreneurs know that product development continues even if your current product is enjoying moderate to high success in the market. A constant reinvention of your product ensures that your firm stays in the market, giving you an opportunity to target more customers and reap bigger profit. But, before earning from a new or improved product, you may have to seek financial help for research and development processes.
  • Hiring more staff. As your business expands, so do your needs for additional human resources. To expand and develop your business, an increased number of experienced staff should be part of your requirements. You may not have enough financial resources to fund this need, so a business loan would be in order.
  • Building a credit history. For new businesses, taking out a loan is a good way to build credit history which can be used later to take out another loan. Tread on this approach carefully and make sure you’re more than capable of paying back what you borrowed.
  • Additional equipment. New business equipment could cost millions, and a business loan can help you purchase it.

There are many reasons to take out a business loan. As a business owner, your main concern should be to use the loan proceeds on something that’s useful to your enterprise. This spending should have the capacity to raise your earnings enough to pay for the money you owe on time.

Different Types Loans You Can Access for Your Business Needs

There are actually several types of business loans that can be customized based on your needs. Some of these are:

  • Lines of credit which refer to a “floating” and specific sum of cash accessible to your business, like a credit card.
  • Installment loans are the most conventional way of getting a loan. Much like how a personal loan works, you’ll receive a specific amount of cash that you have to pay back monthly or through other installment terms. Financial institutions have different rates and terms, so you have to choose wisely to get the best deal.
  • Balloon loans are useful if you need to reduce monthly repayment expenses. With balloon loans, you only have to pay the interest monthly and repay the principal in full on the last payment schedule.
  • Secured loans require banks or lending firms to ask for a collateral before you can take out a loan. Non-payment allows these firms to take possession of your collateral. This may be the best option for you if you have a low credit rating.
  • Accounts receivable loans allow you to borrow from a bank fast while waiting to receive your accounts receivables.
  • Personal loans are possible in the event that your business is not qualified to borrow, especially if your business is relatively new. There are numerous sites that offer personal loans, such as

Key Takeaway

One of the best practices in business is knowing when to take out a loan. Recognizing that situation or moment is key to avoiding bumps on your road to success. Before seeking financial help, make sure to choose the type of loan that suits your financial situation, and come up with a plan on how you’re going to spend and pay for the money. This would make the loan process less challenging, ensuring that you’re able to pay back on time.

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by Brian Perry // Brian Perry is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.