Small Business

How to Determine the Right Time to Utilize Credit for Your Small Business

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Different businesses use different models and there are millions of small businesses with each being unique in a way or another. Despite the differences, all businesses need sufficient funding if they are to survive in the industry.

Most entrepreneurs will agree that you need some additional funds at certain stages of business growth. Over 35% of business owners are in serious contemplation whether to take a loan for their business. At the same time, most small businesses rely on credit to help them take off successfully.

The most appropriate time to get a $5000 loan approval is when your business is doing well financially. However, the right time to utilize credit is a different question altogether. Essentially, it is important to have sufficient forethought and planning before taking a loan if you intend the funds to influence growth. On the other hand, businesses that rush to take loans without a solid plan about how they’ll make payments tend to struggle.

What’s the state of your personal credit?

Almost all startups suffer from lack of sufficient credit history and the necessary track record. Therefore, most lending organizations want you to provide a personal guarantee when you are taking a business loan. Basically, you are responsible for paying the borrowed money since your small business hasn’t posted significant revenues for the banks to recognize it as an independent borrower.

This means that your credit profile is at stake and you need to be very careful not to miss any payment. In addition, it would be almost impossible to get a low-interest loan if you have less than perfect credit scores.

Meeting short-term needs

If you want to have some funds available to meet some unpredictable expenses, then you may want to consider a line of credit loan. Today, it’s possible to get an unsecured line of credit from most banks provided your credit history is not damaged. When applying for the loan, go for a deal that gives you high borrowing capacity so that you can meet any emergency expenses. However, it is upon you to use the line of credit with a lot of discretion for maximum benefits.

Besides getting a flexible access to cash, this arrangement also gives you the chance to build your credit. On the flipside, most lines of credit loans come with an annual fee and if you are not prepared to manage the debt, it becomes expensive as the interest tends to increase with increasing balances.

A line of credit is a strategic move towards ensuring that you won’t be seeking loans when the business is in a desperate situation. The worst time to seek a loan is when your business is in urgent need of cash. For instance, when crucial equipment needs expensive repairs or you are short of cash to handle the monthly expenses. Of course, you can get alternative sources of short-term loans but you’ll be looking at higher interests than you would pay for a line of credit and it could be unhealthy for your small business.

If you are comfortable with a slow growth, then it’s likely that the cash flow generated by the business will be sufficient for gradual expansion. Basically, you shouldn’t borrow when it’s not necessary and there’s no point of paying interest on a loan that you don’t actually need. It is also wise to hold-off a loan decision until your business has grown to the level where it generates sufficient cash flow.

Prospecting the future

Before making any borrowing decision, take some time to determine how the money will contribute to business growth. For instance, if you intend to use the funds towards expanding your business, try to forecast the increase in revenue after executing the plan. If you are seeking funds to improve the business infrastructure, you need to determine if the idea is ideal at the stage your business is in. besides, most lending institutions require you to provide the financial plan and show them clearly the ROI before getting the loan.

However, the most important aspect of forecasting is to determine the cash flow.  You must be in a position to certainly determine there will be sufficient cash flow to service the loan. Alternatively, be willing to comfortably forfeit the collateral you’ve placed for the loan.


Taking a loan for a small business can be very instrumental in influencing growth. However, it all depends on the timing. If the business growth is sluggish, then bootstrapping would be the most appropriate decision as you wait for the business to have sufficient cash flow. But if your business is in a fast-growth industry, it’s better to take the loan early since there will be enough money to service the loan. If you are not sure that there will be sufficient cash flow to make timely repayments, then it’s not the right time for borrowing.