Before You Take A Business Loan
The interest rate is unbelievably low, the payback period is convenient and the lender isn't asking for your kidneys as collateral. So why shouldn't you take the business loan?
The terms of a loan could be very attractive, but there are questions you must have positive answers to before you make a decision. For example, is it the right time to borrow money for your business? Also, can you justify taking the loan in absolute terms?
Let's look at three situations in which taking a business loan is not smart.
1. Impulse spending.
You're suddenly tired of your office building so you borrow money to pay for an unplanned renovation. That's not wise. First, you're incurring expenses outside your budget (which can have a severe negative impact on your profit margin). Second, a renovated office might not necessarily lead to an increase in revenue.
Bottom line: It is unwise to put your assets on the line (as collateral) to take a loan for expenses that are not clear contributors to revenue or expenses your business cannot afford. Remember that you're going to be paying back the loan with your revenue, and you might find that you're spending money faster than you can make it. If a loan won't help you make more money, it's probably not worth it.
2. Funding a speculation.
New business trends are exciting, and it's easy to get carried away by the hype of a 'new age' marketing strategy or a new product that will supposedly transform your business. But SMEs do not have the luxury of expending precious revenue on unresearched or untested claims, talk less of taking a loan to invest in such things. Do some market research and get proof that you won't be throwing your money away.
3. "You might not get better terms."
As pointed out earlier, the fact that the terms of a loan are supposedly amazing should never be your only reason for taking it. Lending institutions will tell you what you want to hear to get you to borrow from them. That's the nature of their business. If you don't read the fine print, you could sign your business away in the name of taking a loan. It's up to you to be smart, look out for your business and avoid a financial commitment that might destroy it eventually.
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