When Should I Take Out a Business Loan?
Unfortunately, most small businesses and start-ups fail, and this is especially true in the case of ecommerce. The reason for this is most commonly understood to be stagnation – not so much a failure to achieve growth but an inability to do the right thing when the opportunity for growth comes along. If you are starting an ecommerce business, then the statistics are not encouraging. But you know this already; ecommerce may have made it easier to start a business, but business success never comes easily.
Sometimes though, the reason small businesses fail is financial hardship at times when revenues are not large. Furthermore, this isn’t always because not enough money is being made, but because not enough money is available when it is needed. For example, your total profits might cover all business expenses, but if they come in at the end of the month or the year, and you cannot cover payments that come along before this, you are in trouble. This is known as a cash flow problem.
Consider Invoice Factoring for Cash Flow Problems
Before thinking about business loans, you might want to first consider invoice factoring if you have a cash flow problem. This works on the simple premise that the factoring company pays your invoice before the customer does. When the customer pays you, you pay back the factoring company. fastFACTR, an invoice factoring service out of Salt Lake City, UT, say that this is one of the most common problems for ecommerce ventures just getting off the ground. If you find yourself in this position, then invoice factoring is a terrific way to cover your expenses without taking out an interest-laden loan.
Therefore, if you run a small ecommerce enterprise, this service is one of the best ways to deal with cash flow issues. Business loans, on the other hand, are for achieving growth when the opportunity for it comes along.
Different Types of Business Loans
So, what are the different types of business loans you can consider. Here are a few:
When taking out a business loan, you will receive a predetermined amount of money and pay it back in installments. The goal here is for your business to grow over the course of these installments, to the point where it becomes another business expense that you factor into your regular financial obligations. This will add to your financial commitments, but if your business grows, then it pays off.
Lines of Credit
This one is particularly good for only taking as much money as you actually need. A line of credit works rather like a credit card – a pool of money you can access, but you only need to pay back what you spend.
Balloon loans will grant you a sum of capital initially, but you’ll only pay back interest on that principle. At the end of the term, you pay the principle in full. This is good for minimizing monthly expenses for as long as possible.
We have already mentioned that you should take out a business loan to facilitate growth. You should not take out a business loan if, at the end of it, your revenue is the same as at the start. If you do that, you’ll lose money overall and your business won’t have grown.
Things can be a good deal more complicated than this. Furthermore, it depends on what type of loan you take out, but this is perhaps the most important principle – the loan shouldn’t just stop you from going under, it should instead facilitate growth. If you manage this properly, you’ll have a bigger business by the time you pay off the loan.