One Important Thing to Keep in Mind Before Getting a Small Business Loan
When you’re trying to get a small business loan, there are many things to consider: How you plan to pay it back, how it will grow your business, etc. But before you even think about submitting an application, there’s some simple math you need to do.
When considering a loan, you need to determine whether the extra cash will allow you to make enough additional money, such that you can offset the cost of paying interest and still come out with a profit.
Let’s look at an example: A lender offers you a $30,000 loan that will require you to pay back a total of $36,000 over 12 months. You should only accept this loan if you’re confident the $30,000 will allow your business to generate at least $6,000 more in profit over the course of those 12 months than if you had not taken the loan.
At the end of the day, a loan should be viewed as an investment. Like any other investment, you want to have a positive return on that money.
In the example above, if the loan doesn’t help you create $6,000 in additional profit, then you’ll likely just need to take out another loan before the 12 months are over. This could then put you in the dangerous predicament of having to constantly rely on loans for your business to survive.
A loan is a fantastic way to kick your business up another level. You should apply your loan to aspects of your business that will generate additional revenue, such as marketing, inventory, equipment, or new hires, to name a few. But always keep an eye on steadily paying back that loan without having to borrow more money.
Image: Horia Varlan/Flickr
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