There are certain situations in the life of a company that require some sort of finance in order to be solved. The owner or owners do not always have money to capitalize the business and the idea of requesting a business loan rises immediately. Knowing which situations require financing through a lending institution and which require other solutions makes the difference between a good businessman and one with lack of criteria.

Financing Future Income or Financing Spending

This is the key to the whole issue. There are mainly two kinds of situations when a business loan can be contemplated as an option. If a company needs funds to make the necessary changes to increase the business’ income, then as long as certain security measures are taken, requesting a business loan doesn’t have to be such a deal. It is important that you make sure that the probability of success is high and that chances are that you’ll effectively have more income if you invest the money you obtain from the loan.

On the other hand, if spending has gone out of control and you need to cover company’s costs, requesting a loan to do so is not the best solution and it’s justified only after certain measures have been taken. Financing unproductive spending with a loan while hoping for your income to increase is a rather dangerous thing to do. Unnecessary expenditures should be cut immediately if such a situation presents and a business loan can be used in these circumstances only to buy enough time to solve it. But you need to make sure to increase your income/spending ratio so as to be able to afford the monthly payments comfortably.

Things that need to be watched closely are: spending on personnel, spending on suppliers, spending on advertisement, spending on equipment and maintenance, etc. You need to ask yourself what can be done so the deficit situation does not present again and you don’t have to resort to a business loan to cover loses anymore. There is a lot of planning and forecasting implied in this and you may need to get help from professionals. Sometimes businesses that have grown uncontrolled need a whole redesign of their processes in order to optimize profits.

What if a Business Loan is the only Option

If after making the necessary adjustments you still need a loan or if you need the money in order to buy you enough time to cut your expenses and increase your income/spending ratio, you should apply for a business loan rather than a business line of credit. This is because a business loan will force you to make all the adjustment while a business line of credit will give you too much flexibility and you may fail to make the decisions that are necessary for your business to recover.