When is the Best Time to Borrow Money for Your Small Business?

Small businesses face many challenges, and accessing working capital is one of them. There's a common perception that borrowing money should be a last resort, but in reality, lending can be a strategic move that helps build your business in the long run. The worst time to seek funding is during a crisis when you're just trying to plug holes. Instead, the best time to borrow is when you can use that working capital to enhance your chances of future success and ensure you can pay it back easily. Here are some key considerations for borrowing money for your small business:

Plan Your Financial Future
While it's true that we can never plan for everything, as a business owner, there are many things you can foresee. For instance, you may need to upgrade equipment, train staff, or undertake renovations. While you may have some funds available, achieving these goals with borrowed capital could be more beneficial. Once you understand what needs to be done in your business, you can take the necessary steps to determine the best type of loan. A long-term perspective allows for clearer thinking and a thorough investigation of all options.

Build Up a Track Record
Accessing loans can be complex. Lenders are cautious and often require a credit history to decide whether they can lend to your business. Since your current financial situation affects long-term lendability, it's essential to engage in borrowing while you can manage the debt effectively and pay it off quickly.

Good Reasons to Get a Loan

• Setting Up Shop: If you're starting a new business, you'll need to create an infrastructure before generating any revenue. This is a good time to access startup funding to give your young business a head start.
• New Location: If your existing business is thriving, consider expanding to a new location. A loan can be a wise choice to ensure the existing branch doesn’t carry all the risk.
• Upgrades and Inventory: If your business needs new systems or equipment, a loan could be the solution. Additionally, if a supplier offers better rates for bulk orders, borrowing to purchase this inventory can secure upfront discounts that will pay off as you sell the stock at a higher profit.

Bad Reasons to Get a Loan

• Shiny Things: Just because something appears to be a sure thing doesn’t mean it is. Conduct thorough research before investing borrowed money into risky projects. Ensure any investments you make yield long-term growth.
• Avoid Stacking: If you're already struggling with one line of credit, taking out another loan to cover that gap can lead to more problems. Daniel Moritz, CFO at Merchant Capital, cautions, “A responsible lender will help you understand if more debt will help or hinder your business.”
• Understand Your Credit Pressure: If you're overwhelmed with debt and previous loans haven’t helped, it may be time to ask some difficult questions about why things aren’t working. Take the necessary steps to make smarter decisions for your business.

The Bottom Line
Smart debt can relieve pressure on your business. By understanding your business’s needs, assessing them in the long term, and building a healthy credit history, you can strategically partner with responsible lenders. Once established, you’ll have quick access to working capital when your business faces challenges.