It is normal to run into cash flow issues when running a small business. Unfortunately, cash flow issues can lead to a downward spiral in your business finances. Poor cash flow affects your business in many ways, such as poor relationships with your suppliers, low employee morale, missed opportunities, failure to keep promises made to customers, limited growth, and the ultimate insolvency of your business. business.
Taking out a loan is one of the best ways to solve your cash flow problems and ensure the survival of your small business. A short-term loan provides the funds you need to cover operating costs, create credit for the future, upgrade your equipment to increase production, purchase more inventory, and take advantage of opportunities. outweigh the potential debt.
Having said that, business loans should not be taken without proper consideration. While loans can be very beneficial for businesses, they also come with their fair share of downsides. For example, lenders will ask you to put some form of collateral to secure the loan. If you do not repay the loan, you risk losing valuable or personal assets. You will also have the added pressure of making monthly repayments and eventually some restrictions will be placed on your business decisions. For example, the bank may require you to keep your company’s debt-to-equity ratio.
With this in mind, smart business owners analyze carefully before deciding to take out loans. Here are several factors you should always consider before signing on the dotted line for a business loan:
Is the loan necessary?
As we’ve noted, while taking out a loan can help you get the financing you need to advance your business goals, it’s not free money. Consider the purpose of taking the loan. Is it absolutely necessary? Loans should never be used for frivolous expenses, like paying for a team gift or buying a new office mat. Loans should only be for essential business expenses such as purchasing new inventory, purchasing necessary equipment, or expanding your business.
In addition, you should also determine if there are other financing options that you could explore. For example, you can ask family and friends for soft loans, take advantage of business credit cards, request cash advances from merchants, try crowdfunding, or seek venture capital.
How much do you need?
Once you’ve established that a loan is, in fact, needed, the next step is to figure out exactly how much money you need. If you take out a loan that is too small, you will be tempted to use the money for different expenses, which means that the original goal will not be met.
This doesn’t mean you should ask for more money than you need – the interest will be costly and you might be tempted to abuse it. In addition, taking out large loans will also have a negative effect on your income to debt ratio.
Remember to factor assembly costs into the equation. These are the costs of processing, taking out and administering the loan. Before taking out a loan, make sure you understand the fees you have to pay. The bank may charge a flat rate or a percentage of the loan amount.
What is your credit history?
Your credit history is a major determinant of your likelihood of obtaining a business loan. It tells lenders the risk level of a loan to a specific borrower. Needless to say, having a good credit history or a good credit rating improves the chances of getting a business loan.
Since Kenya does not have a reliable business credit scoring system, lenders will look at your personal credit score. If this is not your first business loan, the lender will also be interested in whether you paid it off on time. However, don’t worry if your credit history or score isn’t perfect. Many lenders have specific products for business owners with less than stellar credit.
During this time, lenders will also be looking at the overall financial health of your business, especially if you take out a loan with a long repayment period. Therefore, you will need to have complete and accurate accounting, which gives lenders an overview of your business situation and your ability to repay the loan. Organize your books before you go to a bank for a loan.
What is your guarantee?
What do you need to put as collateral for the business loan? Longer-term business loans will require you to post some sort of collateral. Collateral guarantees the lender that even if you default, they can get their money back by liquidating an asset you own.
Therefore, you need to decide which assets, whether personal or business, you are willing to use to secure the loan and how much they are worth. Lenders accept logbooks, title deeds, inventory, cash savings or deposits, equipment or any other valuable asset as collateral. Keep in mind that if you don’t repay the loan, you risk losing the asset you used as collateral.
Be careful, banks are notoriously cautious about valuing a borrower’s assets as collateral. On the other hand, most borrowers overestimate the monetary value of their assets. This is because they consider what they paid for it instead of its current market value. Find an independent appraiser to give you a fair market value for the asset in question. It’s also a good idea to keep detailed records of your assets on your balance sheet – this will help you get a fair valuation.