As every business person would know, loaning or taking out loans are one of the best way to go about to start your business. It is quite hard to raise a huge amount of money for capitalization. That is why a lot of people opt to take out loans in order to start their business. However it is also wise to know when it is a good time to take out a loan. As the financial world can get quite erratic, it is not advisable to take out a loan at any given time. Here are some tips on when it is best to hold back from taking out a loan for your business:
Study the trend in the financial world
There is usually a correlation between low interest rates and lending growth. If banks are more lenient at lending money, then there is a chance of lower interest rates. However if there are events such as a rise in oil prices which would cause a rising inflation, then the chances of higher interest rates are more probable. Keep yourself abreast on these happenings, so you can plan out for any possible rise in interest rates.
Do not take out a loan during times when rates are going up
Shy away from taking out a loan when there is a rise in interest rates. As rates are going up, you have to be more cautious when taking out a loan from a bank as you might have a hard time paying off the monthly payments. Moreover when interest rates go up, you will be spending more on repayments. Some businesses try to pass off the additional cost to the client by increasing the selling price. But if you cannot do so, then you will just need to absorb the difference and your profit will become lower.
Look for other means to raise capital
Aside from bank financing, be on the lookout for other means to generate funds for your capitalization. You can opt to get equity financing or sell some of your shares, in order to generate funds. But make sure to weigh the pros and cons of doing so, as selling shares might bring you about more problems in the future.
Do your homework
If you have good credit standing and are no longer servicing any loan, then taking out a loan can still be a viable option. But before choosing to do anything, make sure that you do your homework. Compare the rates between various financial institutions to check which one would have better savings for the company. If you have some collateral, then check out the payment terms and schedule. Use these factors as a gauge for your decision.
Make use of savings instead
Remember how your mother taught you to save for a rainy day. Well then this can be considered a rainy day. Instead of taking out a loan, it might be better to dip into a bit of your savings. You will not only save up on interest charges, but you will not have to worry about monthly repayments, should the business be unable to make payment. However make sure to calculate the risks and return of investment. Make sure that the money you will be putting into the business is money you can actually spare and is not something you will need for your daily expenses.
Keep close watch on your numbers
With interest rates going up, it is important that your profit will be able to cover the costs for the interest rates along with the payable amount on a monthly basis. By making sure that the cost of expenses including the interest rates of your loan can be covered by your sales, then you should be able to pay diligently every month.
Loans are a big help, be it for business or for personal use. But before taking out a loan, you must always make sure that you will be financially able to service the monthly payments. Otherwise it will become a liability. So before taking out a loan, do make sure to do your sums well. Make sure that the monthly amount payable to the bank will be something you can afford for the period of time you will need to service the loan. That way the loan will assist you in building up your business and not give you bigger problems to worry about.
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2nd image by Stuart Miles / FreeDigitalPhotos.net
3rd image by Stuart Miles / FreeDigitalPhotos.net