As COVID-19 wreaks havoc across the globe, some businesses are going strong, sole holding on against the tide, some new businesses are thriving well and others are losing their grip and shutting doors permanently. Business loans can be a big decision which can have strong impacts on a business. As an owner or a key stakeholder in a business, one may need open advice and practical recommendations to take the right decision for their business’ future. We share our take on it. It would be a stretch if we said that our article here provides a one-size-fits-all solution. What we put together for you are key but broadly applicable points that can be considered, which aim to help decision making clearer for our readers, while they are the ones who would know their situation probably the best.
What is your Business’ Situation?
It is seen off-late, that much emphasis is made in the market by highly opinionated experts who seem to have two starkly opposing opinions – one being that business loans are very helpful for sailing through rough days while the other being that business loans can be devastating at such a time.
The reality however is that a lot depends on what your business is currently facing. What we shall do is, be practical at sharing when and why a loan can be a good or bad business decision and you could use that information/idea to come to a conclusion suitable to your business’ scenario.
| Situations Favorable for a Business Loan | Situations Less Favorable for a Business Loan |
| Established business that just needs funds to sustain comfortably | Startup business under 6 months in age dealing in non-necessity items/services |
| Business in an IT-related or logistics-related sector that is growing during the pandemic | Businesses that depend on mass-gatherings that plan to invest the borrowed money to increase response during the pandemic |
| Businesses that need expansion or added equipment/inventory to serve their customers | Businesses that are already having to cut costs to sustain and are uncertain about their future |
| Businesses strong on less liquid assets but strategically avoiding liquidation of assets by instead choosing loans | Businesses nearing bankruptcy |
| Businesses that have added work due to the pandemic | Businesses that are almost without work during the pandemic |
| Businesses that need to broaden their services a little to be able to serve the new market scenario | Businesses that are desperate to add services hoping to be able to serve just any customer |
These above guidelines are broad but cannot address every situation accurately. For example, if a business is using a loan to just sustain until the pandemic is over, it can be a good decision if the end of the pandemic means great business. Business risks have to be assessed by owners and stakeholders keeping a lot in mind and this article is only intended to assist understand some concepts more clearly to help the decision process be easier.
How do you Plan to use the Loan?
Businesses use loans for many purposes, like buying equipment, paying dues, adding liquid capital, training staff, adding inventory, sustaining the ongoing expenses, and more.
Through years of existence as business loan lenders, we have been able to maintain a list of what business owners tend to use business loans for. While we do not mandate our borrowers to disclose the reason for the loan, studying the industry does help us serve our customers better and for your reference, we have categorized similar uses of loans as safe and unsafe uses keeping the current market scenario in mind.
| Safer Uses of a Business Loan | Less Safe Uses of a Business Loan |
| Relocation to serve more customers or to increase ease of access to current customers or to reduce rentals, etc. | Relocation in hopes to find another region that might work while the current region is not working out |
| Temporary sustenance while the future is certainly bright | Temporary escape from bankruptcy |
| Expanding businesses when required | Expanding business hoping it’ll work while the current business is not working well |
| Adding necessity items to the inventory | Adding luxury items to the inventory |
| Marketing new services designed for the new market scenario | Marketing existing services that lost momentum due to the pandemic |
| Prepare the business for sale when the deal is confirmed | Prepare the business for sale hoping to sell it |
| Diversification of services to cater to a safe market segment | Diversification of services without researching what could work in the current scenario |
| Handle running costs which can also be covered by liquidating assets but a loan is determined to be a better option as the business is healthy as such | Pay employees their salaries while no assets and present income can handle that – it might be safer to consider declaring bankruptcy |
While this list is in no way wholesome and complete, what we have provided here can be used as a broad guide to understand what sort of uses of a loan are on the right track and what are not. If the decision still seems hard, expert consultants can be approached and it is possible that the fee you pay for their advice turns out cheaper than a miscalculated business decision.
Know What Loans could be Available to you
The market being in a turmoil currently, loan options have become limited. The government has stepped in to assist small businesses. If your business is able to qualify for a supportive loan from SBA (link shared at the end), it is the most cost-effective option out there.
Alternative loans for businesses such as those from our services at BusinessCapitalUSA are quicker and more convenient options with shorter terms that reduce the impact of higher interest percentages. To apply for a Business Loan from us, a short online application form can be filled and we shall get in touch with you within a few hours.