When Should You NOT Take Out a Business Loan?

August 26, 2019by Lilah Olsher0

Starting or running a business takes money, plain and simple. Working capital, and lots of it, is required for paying off all types of business expenses. Whether its paying employee wages, stocking up on inventory to sell, or just staying afloat with maintenance if you don’t have cash, you won’t have a business for much longer. Of course, just because your company is not profitable yet, or maybe you are just starting and you don’t have the cash to get your feet off the ground, doesn’t mean you cannot move forward with your business goals. Many successful small business owners opt to take out a business loan to get themselves the funding they need to make sure they can cover all of their expenses. In most cases, getting funding from a lender is possible if you meet certain required criteria that they are looking for (good credit score, a record of steady cash flow, etc). However, there are cases where you should NOT take out a small business loan because it might prove to be even more unhelpful in the end.

Firstly, if you do not meet the requirements of the lender, you will not be approved for a small business loan. These requirements include at least 12 months of bank states illustrating to the lender that you have had some sort of steady cash flow throughout your past year of business (even if your revenue goes up and down over different seasons), a decent credit score (which shows the lender that you are on top of your payments), and your most recent tax return (which assures the lender that all of your taxes are in order).

Assuming you do meet all of the requirements, there are still a few red flags which tell you that you are not in a good position to take out a small business loan, even if you do qualify. One of the biggest red flags that tell you taking out business funding is a bad idea is your income-to-debt ratio. Debt is a natural thing to happen to most companies, especially if you have taken out loans before, or you’ve made purchases bigger than your current profits could pay for. However, there is a point where you have so much debt that you cannot possibly pay off yet another loan.

The rule of thumb here is to make sure that your income-to-debt ratio is less than 50%. If your debt surpasses your income, so that you have more debt than you do money coming in, you are in a very bad situation. Taking out another small business loan, even if you want to use the funds for bumping up your business, will most likely end you up drowning in even more debt. If you find yourself in this kind of situation, you are better off waiting with yet another loan, and instead, trying to find ways to cut back on expenses and get your existing debt down as much as possible. Once you find yourself afloat once again, you will be in a much better position to take on another loan to make your business dreams a reality.

Leave a Reply

Your email address will not be published. Required fields are marked *