When should you ask for a loan for your business

William Arsn

If you want to start or have a business, at some point you may want to consider applying for a loan, either to make it work, to improve it, or to grow it. However, the decision is not easy, among other things, you need to consider your company’s finances, your financial situation, how much money you can apply for, and how you will pay off the loan.

Here we share some key points inspired by luminablog.com to find out when you are ready to apply for a loan for your business.

You know perfectly well how your business works

A golden rule in investing is: don’t invest in something you don’t understand. This is because if you do not understand it, it will be easier to make mistakes and lose money. Therefore, you need to know 100% how your business works. Identify your current market, competition, target audience, and define an original value proposition. It can also help you analyze a list of online loans before applying for a loan.

You have an analysis of the financial situation of your business.

To stimulate your business you need to know if it is profitable, how much you will get from income, what are the fixed and variable costs, how much you have to pay in taxes and interest on debts (if you have them). Preferably, you should have sales to confirm that people are willing to pay for your product or service.

Identify the purpose of the loan

A loan can help you start, streamline or improve your business. Details about what you need: raw materials, human resources, or other types of goods and how this investment will translate into more money in your business. Also, ask yourself if you need to apply right now or if you can wait and save to pay for this.

You know your ability to pay

It is not recommended that your monthly credit payment be greater than your ability to pay. Personal finance experts recommend that you have a maximum of 20% of your monthly income as debt. 

That way, if something goes wrong, you won’t jeopardize the payment of essential expenses, such as food, transportation, schooling, and more. Make a detailed budget to know exactly how much to pay in debt and if necessary to reduce some expenses.

The most important thing is that you can pay off a loan without losing sleep. Simulate your loan and see if it fits your loan capacity.

You know your credit score

Now, to get a loan with a better interest rate, it is ideal to have a good credit history. Through your credit score (a score of your credit behavior), financial institutions will know if you are a good payer; and so they will determine good or not-so-good conditions.

The importance of loans for SMEs

Small businesses are a key player in the economy of all countries, due to the number of jobs they create, as their products strengthen local economies and support their communities.

For example, according to INEGI’s 2019 economic census, in Mexico, companies produce more than 35 million jobs and 94% of them are generated by micro-enterprises.

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