Small businesses are thriving in America, according to the most recent figures available from the U.S. Bureau of Labor Statistics (BLS) and the US Census Bureau. Small businesses are the general entry point for entrepreneurs to build their dreams. Businesses that move from startup phase to expansion account for the largest number of new jobs added to the economy. The Small Business Administration (SBA) estimates that since the 1990s, nearly 8 million new jobs have been created. One factor that helps support the small business sector is the availability of firms that issue small business loans to these startups.
HOW SMALL BUSINESSES CAN EXPAND WITH WORKING CAPITAL
There are many ways that small businesses can generate working capital to grow and contribute more to the economy.
USING PERSONAL SAVINGS
A good many entrepreneurs fund their business ventures through personal savings that they have amassed by working in a career and sacrificing for years. Others stay employed for a while until the fledgling business takes off, using their income to keep the business afloat. While this is a noble way to get started, there are a few problems with this model. First, it can put personal savings and property at risk during a hardship. Second, unless a profit is generated early on, the entrepreneur will quickly run out of funds. Lastly, the entrepreneur will quickly experience burnout from working and trying to operate a business.
GETTING A GRANT
Another way that an entrepreneur may fund expansion is by applying for grants through the government and non-profit agencies that offer this benefit. However, grant funds can be very difficult to obtain unless the entrepreneur meets strict requirements and has the patience to wait long periods of time for the bureaucratic red-tape to happen. Also, grant funds are limited and may only be obtained once. Few people find that they are eligible for grants and after dealing with the frustration of jumping through hoops, find that the amount is not worth the effort.
SMALL BUSINESS LOANS
Small business loans are another way that a small business owner can afford to expand operations. The process of applying for and being approved can be fairly simple. Even with poor credit, an entrepreneur can obtain business funds to pay for any kind of business growth needs, from hiring more employees to buying new equipment. While the amount of a small business own can vary, some entrepreneurs may choose to take out several smaller business loans over a period of time to ramp up their expansion.
IS TAKING OUT MULTIPLE SMALL BUSINESS LOANS A GOOD DECISION FOR YOUR BUSINESS?
Right now, you may be reading this because you are considering taking out another small business loan for a business growth plan. This can be a smart (or stupid) thing, depending on if you are ready for this decision. How can you determine this?
The SBA provides some guidelines for entrepreneurs who may be ready to take out small business loans. Once you have completed an analysis of your business cash flow, here are some ways to determine if you are ready.
PAYING OFF DEBTS AND COLLECTING ON RECEIVABLES
Have you been paying down your current debts on time so you have less than a 40% debt to income ratio? How about your accounts receivables – are your clients at least within 30 days or less in payments to your business? If the answer is no to either of these factors, then you may want to work on your finances a little more before taking another loan.
CHECKING THE ACCURACY OF BUSINESS CREDIT HISTORY AND VENDOR ACCOUNTS
Your credit history can have an impact on your ability to obtain more small business loans, including your interest rates. Make sure to run a business credit history, clean up any discrepancies, and then you are ready. Check with vendors too so that all on-time payments are reported.
ABILITY TO PAY ANOTHER SMALL BUSINESS LOAN IN A REASONABLE AMOUNT OF TIME
Can you reasonably afford to take on another monthly loan payment? Take a look at your business statements to determine if you have enough recurring income that can be used for paying down your current business loans and taking on more.
SMART REASONS TO TAKE OUT MULTIPLE SMALL BUSINESS LOANS
There are some good reasons why a smart entrepreneur would want to take out multiple small business loans. These include:
- Business expansion, property and facility updates – because you are reinvesting in the business itself, this is less risky.
- Paying down high interest loans and credit accounts – this makes good business sense and improves your business status and credit worthiness.
- Taking on new business opportunities – some things are too good to miss, so the time is now to expand your business.
- Hiring a skilled workforce – it’s always a good idea to hire great people and invest in their salaries, benefits, and training.
STUPID REASONS TO TAKE OUT ANOTHER SMALL BUSINESS LOAN
Then there are the not so smart reasons to keep taking out small business loans, including:
- To cover payroll (because the business is failing) – if the business is falling apart, or facing bankruptcy you don’t want to take on another loan. Instead, consult with a qualified attorney and accountant.
- You don’t have enough collateral – in the startup phase, you may be lacking collateral that can be used to offset a loan. Find out what options you have before you choose this route, such as a Merchant Cash Advance, or you may be risking your home and other personal property.
- You are not generating enough revenues – if you are not making money, or if your business is losing money, it’s not viable enough to take on another small business loan. Get your finances in order first.
Of course you will want to talk with an expert at United Capital Source to decide if now is the right time to take on multiple small business loans, or if there is another better option for expending your business this year. We are happy to show you the many ways you can get the money you need to make your dream a reality.