Small business owners in Chicago, IL, are no strangers to taking out loans. In a recent study, the Federal Reserve Bank of Chicago found that nearly 30 percent of small businesses in the city have taken out a loan in the past 12 months.
However, just because you can get a small business loan doesn’t mean you should. Several factors are important to consider before taking out a loan, and making a rushed or uninformed decision could end up costing your business in the long run.
Here are five common justifications for taking out a small business loan – and why they’re flawed:
1. “I need the money to keep my business afloat.”
If your business is in danger of going under, a loan may seem the only option. But taking on debt is not always the best way to keep your business afloat. In some cases, it may even make things worse.
Before taking out a loan, explore your options for raising capital, including selling assets, cutting expenses, or seeking investment from venture capitalists.
2. “I need the money to grow my business.”
Growth is vital for any business, but you should not finance it with debt. If you have decided to apply for a business loan to finance your business growth, make sure that you have a solid plan for where the funds will go and how the resulting growth will be funded.
3. “I can’t get a loan from a bank.”
Banks are not the only source of business loans. Many alternative lenders, such as online lenders, may be willing to give you a loan.
4. “I can’t afford the interest payments.”
Interest payments can be a burden, but they should not be the deciding factor in whether or not to take out a loan. Suppose you’re confident in your ability to repay the loan and have a solid plan for where exactly the money goes. In that case, you should not let the interest payments deter you.
5. “I will take the loan when I need it the most.”
This is a common misconception. Many people think that they should only take out a loan for business when they are in dire need of the money. However, this may not always be your best course of action. If you wait until you inevitably need the money, you may not be able to get a loan at all.
Make sure your reasons for applying for a business loan are not based on these five common misconceptions. If you are clear about your needs and have a solid plan for using the loan, you will make a better judgment to get the funding you need.
Are You Struggling With Your Business Loan?
It can be difficult to repay a business loan, especially if your business is not doing as well as you had hoped. If you are mulling over the decision of whether to go for a small business loan or if you want to learn the mechanics, 7 Figures Funding, serving Chicago, IL, is here to help.