When to get a small business loan

Most businesses will have some form of cash injection at some point in their journey. So how do you know that your business is in need of funding? This article will cover the four signs that could show you it’s time to get a small business loan:

• 1) You’re ready to expand your location
• 2) You need to invest in equipment, technology or tools
• 3) Your inventory is flying off the shelves
• 4) Your cash reserves are low
• So what lending options are available to small businesses?

You might notice that your business performance is starting to outgrow your physical location. 

For example, if you are an artisanal baker, you might find that your home kitchen is no longer enough to fulfill all the orders you’re receiving. 

In this case, a term loan may be needed so you can move into a new premises that fits your business needs better — such as a physical bakery store, with a bigger oven, fridge, and more space for storing goods.

Use a revenue forecast to find out if you’ll still manage to turn a profit while paying back your loan with this extra space.

If you need certain machinery or IT equipment to be able to start trading and don’t have the cash available, then a loan may be a no-brainer to be able to start the business. 

However you might find, like the bakery example, that your current equipment is no longer sufficient for the demand your business is receiving. Taking out a loan could therefore allow you to purchase equipment that allows you to scale up your business and grow. Using the baker example again, a new industrial sized oven would allow you to make more baked goods so you don’t run out during the lunchtime rush, as it would allow you to meet customer demand.

As well as physical equipment, the systems you currently use might be slowing you down, such as an outdated payment system or an accounting system that takes a lot of manual input from you. Investing in making your business run smoothly may pay you back later down the line as customers will have a better experience and you could save yourself time and stress.

If you are a product based business, then inventory can be one of the largest costs associated with running your business. If you’re finding that your stock is selling out fast, then you might benefit from investing in more inventory so your stock levels are replenished sufficiently.

If your business is seasonal, you might also find that you have to purchase a bulk order of stock at a quieter time of the year, in order to trade during the busy time. A loan may support this if you don’t have the cash to hand.

Cash flow is the lifeblood of any business, and if your cash reserves are running low you may want to look at other options so you have a safety net during hard times.

Every business is different, but it’s generally accepted that it’s beneficial to have at least three months worth of cash available in your business account, so that if sales were to dip then you’d be able to manage for a while until things picked up again. If you don’t’ have three months worth, then a form of funding may be a good option as a safety net, so you can start to work on improving your cash flow and reserved savings.

There are various types of ‘loan’ that can fund a small business, so research to find out which of the following options may suit your needs best.

The most common type of loan that comes to mind when you think of ‘lending’ is a term loan, where you borrow a set amount of money and it is paid back over a set time period, through monthly instalments. These can be secured or unsecured:

• Secured: the loan is backed up by a valuable business asset as ‘security’ also called collateral — potentially your premises or a business vehicle. If you fail to repay the loan, the lender can then use the collateral as repayment.
• Unsecured: this type of loan requires no collateral. Some lenders may ask you to sign a guarantee where you will be personally liable for the debt or use a guarantor who will take on the debt if you can’t.

If you have been trading for less than two years then you can apply for a start-up loan through HMRC for up to £25,000. You’ll pay back the loan over 1-5 years and it has a fixed 6% interest rate. You can find out more on HMRC.

This is a flexible type of finance lending, where the lender gives you the agreed amount of cash upfront and you repay it via a percentage of your overall card sales.

Almost like an overdraft, this is a flexible cash facility that allows you to dip in when needed, and you only pay the interest when funds are used.

Invoice financing can be used to ease cash flow issues if this is why you’re looking at a loan to tide you over. If a client has not paid an invoice on time or you need the money quicker than they can pay it back, then an invoice finance lender will give you the total of the invoice and you pay it back once the customer has paid you, with interest. 

Business credit cards give you the flexibility to access cash as and when you need it. They have the added benefit of building up a good business credit score when used properly.

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app will give you real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with an accountant instantly without worrying about duplication errors, data lags or inaccuracies. Find out more here to save yourself hours of accounting admin and manual bookkeeping, so you can get back to running your business and doing what you do best.