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Taking out a corporate loan is a normal part of growing your business. Gaining access to capital can let you expand into new markets, renovate your offices, and generally complete major projects that let you better service your clients.
However, taking out a loan at the wrong time can be dangerous. If you don’t have the financial security to pay it back, you could be hurting your business’ long term success. Keep reading to find out when you should consider taking out a corporate loan.
The Types Of Corporate Loans
There are three main types of corporate loans that you can choose from, each of which is best suited for a specific financial need. You should talk to a financial advisor about which type of loan best fits your business’ stage and goals.
Line of Credit
A line of credit is the most common type of business loan that you can take out. These act as a source of credit that you can use for general purposes, like ordering inventory or paying salaries. Lines of credit are “revolving credit,” much like a credit card.
Installment loans are much like traditional consumer loans or mortgages. You get the initial sum of money, and then have to make monthly payments on that amount over the term of the loan until it’s completely paid back. These work well for business expansion purposes or other major projects.
Balloon loans are a type of loan that helps keep your monthly costs low, but they are risky. Balloon loans will only have you pay the interest on the loan month to month, but once the term of the loan is complete, you’ll have to pay the entire borrowed amount off at once. These loans are really only ideal if you’re looking for a period of intense growth, and are banking on the success of your efforts to be able to afford to pay the loan back.
When To Take A Corporate Loan Out
Corporate loans are not a spur of the moment thing. You should only take out a corporate loan when you have a specific purpose for it, and a projected means of being able to pay it back. Taking out more loans than you can handle can put your business at risk.
New Market Entry Or Expansion
Moving into a new market, or opening new locations in an existing market, is probably the most appropriate reason to consider a corporate loan. Your business likely does not have tons of free money floating around in the budget that it can use to expand its operations, which is why borrowing the money is necessary.
Another key reason to consider opening a line of credit or getting an installment loan is to replace old machines and equipment with new ones. Newer equipment, even if you’re just replacing older laptops, can help make your workers more efficient and productive with their time.
In some cases, it makes sense to open a line of credit just to build your business’ credit score. If you’ve just opened, you likely don’t have a credit rating, and it can be hard to get access to the larger amounts needed to expand your business in the future. Maintaining a small line of credit and regularly paying it off can help improve your credit history, just like it can for an individual.
Credit Grows Businesses
Accessing credit is necessary for businesses to grow, and a corporate loan is by far the most common way for small businesses to expand their operations. Considering a loan is not something to take lightly, but it’s also not something that you should be hesitant to do.
For more information about running a small business, check out the rest of our blog!