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Should I get a Small Business Loan? 6 Factors to Consider

Growth and Operations

Should I get a Small Business Loan? 6 Factors to Consider

Updated: October 9th, 2023

Should I get a Small Business Loan? 6 Factors to Consider

Getting a small business loan can put your operation on a steady upward trajectory—but only if you get it at the right time. 

Getting a small business loan at the right time can help you maximize your returns and minimize your stress. Depending on how you use your loan, you may have more cash flow flexibility, operational consistency, and freedom to invest in your business’s growth and take advantage of promising opportunities. 

On the other hand, getting a business loan at the wrong time can put you in a tough position. Not only do you risk compromising your finances and taking on more debt than you can carry, you may also jeopardize your business credit if you’re unable to pay back your loan on time. 

That’s why it’s prudent to consider not just why you need a loan, but when it makes sense to get one. So, how do you figure out the right timing for your business? We’re breaking down everything you need to know below. 

6 factors to consider before deciding when to get a small business loan

As you reflect on your operation and goals, pay close attention to these six factors:

1. Business finances 

Your business’s financial health is the foundation of your operation—and the most important factor in deciding when to get a small business loan. Before you apply for a business loan, you need to find out if you can carry the debt (and for how long), when you could realistically pay your loan off, and to what degree a loan would help advance your operation. 

To get those answers, it’s helpful to look at your: 

  • Debt service coverage ratio (DSCR): A DSCR below one means you don’t have enough money to pay off your debts in full, while a score above one indicates that you have enough income to cover your debt. Calculate your ratio here
  • Sales and revenue over the past 12 months: Consider how steady your sales and revenue numbers have been, then compare them to your profit and loss statements from the past 12 months before applying for business loans. 
  • Current cash flow and cash flow forecast over the next 12 months: Consider how much flexibility and consistency you’ll have with your cash flow. 
  • Sales forecast over the next 12 months: Get a clearer picture of your sales and revenue forecast over the next year to see how likely you are to generate more money without any additional financial investments. 
  • Credit score: It’s critical to examine your business and personal credit scores to find out where you stand. Without a decent business credit score or personal credit score you may not secure favorable loan terms and an affordable interest rate. 

When getting small business financing, you should have enough money to make monthly payments on time and in full, but you don’t necessarily need to be in peak financial fitness to obtain a small business loan (though getting a loan when you’re successful has its perks). 

If you have a strong sales forecast, for example, that’s a good sign that you’ll be able to generate enough money to pay off your loan by making regular monthly payments. However, if you have spotty or inconsistent sales, you may want a loan to invest in more strategic marketing tactics or product enhancements to increase your sales numbers. 

That’s why your business’s finances are just the first piece of the puzzle. You also have to consider your immediate operational needs and long-term business goals when considering small business loans

2. Operational needs and long-term goals

Most people take out small business loans for one of two reasons: to stabilize operations or to invest in growth. If you decided to apply for business financing now, what would you put the money toward? 

Start by reflecting on your current operations, thinking about what would help you thrive on a daily basis. You might want more cash flow stability for utilities payments or a new point-of-sale system to streamline your inventory management. Or maybe you need enough capital to replenish your inventory ahead of a busy period. Small business loans can help cover a variety of business expenses.

Next, consider your business’s short and long-term goals, then outline the steps you need to take to hit those milestones on time. You may want to hire a marketing agency to grow your customer base, for example, or maybe you want to purchase a second business or expand your product line. 

Once you know what you would use a loan for, you can think about the timing that makes the most sense. 

3. Business data and market research

Your business’s data gives you insight into your current position and growth potential, while market data gives you a greater understanding of your customers and competitors. When you look at the combined information, you’ll have a better sense of where customers are spending their time and money, what the demand for your business is like, and whether or not there’s immediate growth potential in your corner of the market. 

For your business’s data, focus on collecting and analyzing: 

  • Marketing data, like your website, social media, and email analytics
  • Customer experience data, like customer retention rates and customer reviews
  • Sales data, like your lead to conversion rate and yearly sales growth rate

For market data, aim to research:

  • Current consumer trends and shopping habits
  • Industry news
  • Competitor demographics

4. Economic conditions

The economy has a massive influence on the type of loan and interest rates small business owners can qualify for, so it’s crucial to consider what’s going on on a macro level. Staying up to date with the news and reviewing small business quarterly reports can help you make a more informed decision about financing

Right now, for example, rising interest rates are complicating the question of when to get a business loan. At the end of 2022, The Federal Reserve raised its benchmark interest rate to 7.5%. For some small businesses, that rate isn’t worth borrowing capital right now; for others, the benefit to their bottom line could outweigh the cost of interest long-term. 

5. The type of loan and loan provider

The financial product and loan provider you choose play a significant role in your loan experience—and outcome. Not only do different loans accomplish different business objectives, they also have different terms and repayment timelines.  

Some loan providers have strict usage requirements and detailed application guidelines, while others are more flexible. Certain providers only accept applicants with a great credit history, while others have more leniency. 

Make sure you research your loan options and providers thoroughly to see which timeline, experience, and terms make the most sense for your business. Here are a few common loan types to consider:

  • SBA loan: SBA loans have a multitude of uses and offer more affordable interest rates than online loans, but the Small Business Administration has stricter eligibility requirements and longer loan turnaround times. 
  • Business term loan with an online lender: A term loan with an online lender gives you upfront cash in a matter of days, and typically has flexible uses and repayment plans.  
  • Business line of credit: Business lines of credit are great solutions to temporary cash flow crunches. 
  • Equipment financing: Equipment financing gives you money to buy or lease new machinery or technology to improve your business operations. 

6. Business resources

Your business’s resources go beyond your finances—they also include your time, team, and tools. There’s no point in borrowing money that accrues interest unless you have the means and bandwidth to execute your plans efficiently. 

When evaluating your resources, think about your:

  • Time: How full is your plate right now? Would the process of applying for a loan and allocating the funds give you some time back in the long term, or add more stress and to-dos than you can currently handle? 
  • Team: Do you have enough people to help you execute your business plan post-loan? For example, if you need a term loan to buy and renovate a new building, do you have enough employees and contractors willing to assist in that endeavor?
  • Tools: Do you have the equipment, technology, and connections you need to reach your goals?

How to decide when it’s the right time for a loan 

The bottom line: there’s no exact formula that tells you when to get small business financing. The decision to get a loan is based on quantitative factors, like your finances and current market data, as well as qualitative factors, like your growth plans and business resources. However, there are certain signs that can point you in one direction or another. 

Signs now may be the right time for a loan

  • If your DCSR is comfortably above one
  • If you have big growth plans and the resources to make them happen
  • If an amazing business opportunity comes along
  • If sales are increasing and you want to expand
  • If you need a temporary cash cushion and have a realistic plan to pay off a loan
  • If you have good credit to secure more favorable loan terms

Signs you should hold off on a loan for now

  • If your DSCR is one or below
  • If your business credit is poor
  • If you’re a new business and need to establish your business credit, sales, and cash flow
  • If you’re not sure a loan will help you accomplish your goals
  • If you’ll struggle to make the monthly loan payments

Getting a loan with Funding Circle

If you’re ready to get a loan now, Funding Circle is a flexible, fast option. Our business term loans let you borrow anywhere from $25,000 to $500,000 if you qualify, with repayment periods from six months to seven years. Applying is quick and easy; you just fill out some basic information and upload a handful of documents, and you’ll get an answer from our team within a day. 

Apply for a term loan today, or check out our other funding options


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