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Five Situations Where You Shouldn’t Use a Small Business Loan

We look at when it doesn’t make sense to seek outside funding for your company.

August 17, 2016

 

One of the most common reasons small businesses apply for a loan is to cover a short term gap in cash flow. Other top reasons include funding business growth, paying for an unexpected expense, and acquiring funds to use as a safety net. Sometimes the loan pays off. Other times not as much. Sometimes it’s hard to tell beforehand if it’s a good idea or a bad idea to get a loan. We wanted to give you an idea of when you may be better off not requesting a small business loan.

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When You Aren’t Sure When the Gap Will End

Financing a cash flow gap is part of doing business. Ideally, your profits during the good times would be all you need to make it through the bad times. That doesn’t always happen and sometimes you need a loan to keep operations afloat. Just make sure you have a good idea of when you’ll be profitable again.

Worst-case scenario is that your business will never be in the black again. If that’s the case, you need to realize that borrowing money is only going to make your problems worse. It might be time to throw in the towel.

If you think good times are just around the corner but you’re not sure how far away that corner is, then you’re still in a tricky situation when it comes to deciding to get a loan or not. This is because during the life of your loan you’ll have to pay interest or a factoring fee. These payments will dig into how much your business makes. If it takes you a long time to bounce back, then the interest might get too big to handle.

Some fall into a “cycle of debt” in which the interest fees grow at a faster rate than the borrower’s ability to pay them off. In this scenario, the debt gets bigger and bigger until it is unmanageable. There have been cases where businesses borrowed money to get back on track, but by the time their company had found its footing again the debt had grown too large to pay back. Some of these businesses had to file for bankruptcy.

The danger is that if you don’t know when things are going to turn around, then you can’t be sure that the loan won’t break your business. That’s reason enough to take a moment to reconsider your decision to take out a small business loan.

When You Have the Money Already

This might seem foolhardy, but some businesses take out a loan when they have the money available to them already. Why would they agree to pay interest and fees for money they don’t have to borrow? Sometimes it’s to secure a safety net -- money in the bank just in case you need it for an emergency expense. This is smart for some businesses, but sometimes it makes more sense to use the money you have so you don’t have to pay the interest that accompanies a loan.

When You Don’t Need the Money

Many retailers struggle every month besides November and December, knowing they’ll recoup their debts during the holiday shopping season. This leads some businesses to start an annual loan ritual. Each year they apply for funding during the offseason. Sometimes these habits need to be reevaluated. Before you take out that yearly loan, make sure you actually need the money. If your slow season hasn’t been so bad this year, you might actually have enough to not need that extra funding.

This is just one example of when you think you need funding but you actually don’t. There are more. So before you ever take out a large loan, you should get a professional’s opinion about whether you need the money, how much you can afford to borrow, and how much you can reasonably afford to pay back each month. After the audit, you may get the good news that you don’t need the loan money after all.

When All You Have Are Bad Options

Maybe you can afford a good loan, but that doesn’t mean it’s the one you’ll qualify for. If your business credit isn’t good or if you haven’t been in business very long, you may be presented with a relatively high APR or factoring rate for your funding. So if your business plan was based around a loan with upwards of 20-percent interest, you may be thrown for a bit of a loop if your provider says you’ll be required to pay double that.

It’s a sad truth, but the more you need a loan the more you’ll have to pay for it. We strongly recommend a reevaluation of your business plan if it turns out that your loan is going to cost more than what you were expecting. You’ll need to break out that calculator again and make sure that you’ll be able to pay off the loan at the higher rates.

When You Are a Startup

Most small business loans aren’t designed for startup companies. And a lot of the providers we work with won’t even lend to startups. If you’re looking for funding for your new business, we recommend using a personal loan site to request up to a $35,000 personal loan. Again, though, you’ll need to really look into the fees. Many personal loan sites have fees quite a bit higher than you might have been planning on paying for your small business loan.

We’re not trying to talk you out of getting small business funding. It’s our job to find you a provider. We just wanted to let you know that there are scenarios out there where it doesn’t make sense to pursue small business funding. If you’ve decided that a loan is right for your business, please use our request form to get started.

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