It’s probably going a bit too far to say that the needs of small businesses are like snowflakes—in that no two set of borrowing circumstances are alike.
But it’s definitely true that not every small business fits into the same lending and borrowing box.
Some companies are best served by a simple business credit card, while others might be best suited to a line of credit or invoice financing. In some cases, a business might need some combination of the three—or an even larger and more diverse financing package.
It all depends on the particular financial needs of the business.
For business owners who are considering juggling multiple types of loans at once, it pays to fully investigate the pros and cons of that approach. Let’s take a closer look at the potential benefits and drawbacks of pursuing multiple different loan offers.
When Does Taking On Multiple Loans Makes Sense?
Business owners know that capital needs are notoriously difficult to predict. Business waxes and wanes, unexpected opportunities come up, and sometimes, unfortunately, disaster strikes.
Having immediate access to multiple lines of credit can give you enormous flexibility if an unforeseen opportunity (or crisis) develops.
It lets you react quickly, so instead of waiting days or weeks to apply for and receive new financing, business owners can tap into their already-existing sources. This rapid response can make a huge difference when it comes to staying competitive or riding out a period of turbulence.
Improving your credit
Small business owners also know the importance of good credit.
Operating without it makes running a business more expensive—and that can have a devastating effect on efforts to stay competitive. Unfortunately, improving business credit is often a long and quite arduous process.
Taking on multiple types of loans, though, can speed up the process.
By making consistent and timely repayments, business owners can improve their credit score in an expedited fashion, ultimately making the day-to-day operations of their small business less expensive.
Plus, the strategy of balancing multiple funding sources essentially gives your business access to a revolving loan.
You can also stagger your debt payments, giving you greater flexibility.
For example, instead of having one large payment every month, businesses can make smaller payments on a more frequent basis. This tactic would be especially helpful if your business has an unpredictable revenue stream.
Safety & Security
Finally, having a variety of funding sources in play at the same time can provide you with a measure of security.
By having funds readily available, your business can operate with a bit of a safety net, since you know that additional money is there if—and when—it’s needed.
Some Problems with Taking On Multiple Loans
Given the benefits above, servicing a variety of different loan products sounds like a smart business play.
In some cases that’s undoubtedly true, but there here are some possible issues you should consider before moving forward.
Do you need all that financing?
First, you need to honestly evaluate your current financial condition.
Is it actually necessary to juggle multiple loans simultaneously? Or can your business operate just fine with one line of credit, one business card, or one alternative loan?
Can you service all that debt?
You also don’t want to spread yourself too thin.
Do you have the resources to keep all these loans in good standing? If the answer is “no”—or even “maybe”—you could be courting disaster. The financial penalties associated with loan default aren’t to be taken lightly. If you’re spread too thin and start missing payments, any positive benefits you got from this approach will be deeply outweighed by the negative consequences.
Are your motivations right?
You should also ask yourself if you can resist the urge to borrow for non-essentials.
Let’s face it—every consumer knows that it’s easier to pay in plastic than to part with hard-earned cash. Business owners who fall into this trap can dig themselves a hole quickly, leading to potentially perilous outcomes.
How well do you understand these loans?
Finally, anyone considering taking out multiple types of loans should familiarize themselves with the different options they’re looking into.
Do you fully understand the difference between a line of credit and a term loan? Have you explored non-traditional borrowing options like invoice financing? Do you know how each type of credit works, and which situations they’re better or worse for?
Armed with a good working knowledge of the different kinds of business loans available, you can decide which loans will work best for your business when grouped together.
Taking out multiple types of loans at once isn’t for everyone. While it comes with plenty of benefits, it can also carry considerable risk.
By fully considering the pros and cons outlined above, business owners can decide whether or not this the best option for them. Good luck!