The growth of alternative lending has made taking out a small business loan a much faster and simpler process than it has ever been before.
Evaluating whether the statements below apply to your business can help you make an informed decision about applying for a loan to start or expand your business.
1. Your Business Needs More Funding to Grow
Have you run out of growth options to pursue because you’re limited to the cash you currently have on hand?
Your growth pattern is often a good first marker of whether a loan can be helpful for a business to grow. If your sales volumes are holding steady, it may indicate that your business could benefit from additional funding. If sales are declining, however, adding a loan payment may not help.
2. You Have a Plan
When you have a detailed plan for how you will use the money to improve your bottom line, it can prove helpful not just for the loan process, but also as a useful reference tool when it comes to putting the plan in action. Better perks for employees? New office furniture? Every business owner has a wishlist of “nice to haves” that they would love to contribute to their business, but it’s important to make sure you’re using your loan in ways that will positively impact your bottom line.
3. Consider a Range of Funding Options
Before you approach a bank or alternative lender to take out a loan, consider the different ways you might be able to fund your business growth.
4. You Can Afford a Small Business Loan
Determining that the loan amount is appropriate for your business’ size and revenue is important. One way to measure whether a loan amount is advisable for your business is to to calculate your debt service coverage ratio. This metric is designed to measure your ability to meet your debt obligations without dipping into cash reserves. A debt service ratio of 1 means that you have just exactly enough income to cover all your debt with nothing left over to cover unexpected events. In general, a debt service ratio of 1.5 is considered average.
For more information, see 4 Essential Steps to Complete Before Seeking a Loan.