If you operate a small business, you undoubtedly understand the concept of profit and loss. You know that when your expenses increase, your profits decrease. You strive to control your overhead and labor costs, negotiate with suppliers for the best prices and closely monitor expenses such as the interest rates you pay. However, there are times when cash loans for a small business justifies a high interest rate.
When Cash Loans for Small Businesses Warrant High Interest Rates
Not too many years ago, if you needed a cash infusion for your business, you could drop by your bank and discuss the issue with your banker. Since your banker knew you and your business, your chances of receiving a cash loan were good. However, as author Ian Mount notes in the New York Times, those days are over. New regulations and economic conditions have left emerging small business with few options, and all of the alternatives are expensive.
There are times, though, when you absolutely must have a cash loan. Deciding whether your situation warrants paying the high interest rates requires you to evaluate what will happen if you do not receive the cash that your business needs. Depending on your specific situation, the following list demonstrates a few of the times when you may need to absorb the cost of a cash loan.
• If you will not be able to pay your employees on time, you might want to consider a loan. In addition to running afoul of state and federal labor laws, you risk alienating your employees. Employees are valuable assets that can help your business thrive — or sabotage your efforts.
• You might consider taking out a loan if your operation will be shut down without the cash. For example, if your utilities will be disconnected or you need supplies to manufacture a product to fulfill an order, securing a loan may be a high priority.
• If your employees are covered by workers’ compensation, your premiums must be current to keep your policy in force. Allowing your policy to lapse could have dire consequences for your business if an employee is injured on the job while you are without insurance.
• You have an opportunity to expand your business, but you must act immediately. For example, the space next door that you have been needing and coveting has become available at last, but rental properties in your neighborhood go quickly. You might have just learned about an upcoming trade show that could generate significant business.
• If your place of business is unsafe for customers or employees, you may need a cash loan to correct the problems before someone is injured. Perhaps a broken pipe is depositing water on the floor, making a slip-and-fall accident more likely, or a piece of equipment is missing an essential safety guard.
• Depending on the taxing authority and the type of tax, you could incur significant fines and penalties for late payments. For example, depositing your payroll taxes can cost you as much as an additional 15 percent, according to the Internal Revenue Service.
• You might need to protect a valuable source of credit that could be jeopardized by a late payment. Perhaps you have a credit card with an extremely low interest rate, but you fear what might happen if you fail to make your payments on time.
• Your insurance will lapse if you do not make a payment. If you provide medical insurance for your employees, you must ensure that it always in force. Neither you nor your employees should be driving a company vehicle that does not have the proper insurance. You also want to ensure that your property insurance remains in force.
Preparing for a Cash Loan for Your Business
Even if your situation is urgent, you need to take the time to evaluate a few critical factors before you accept a loan.
• Have your bookkeeper prepare a current, accurate cash flow statement. This will give you a realistic picture of how much money will be coming in and going out in the near future.
• Explore alternatives to a cash loan. Do you have obsolete equipment that you could sell? Would reducing your hours of operation provide the funds that you need? Do you have personal assets that you would be willing to part with for the sake of your business? Would a friend or relative be interested in investing in your business?
• Consider alternative sources of capital. Merchant cash advances, for example, allow you to receive a lump-sum advance on your future credit card receipts.
• Shop around to find the best offer. Compare interest rates, loan terms, monthly payments and additional fees that the lender may charge to determine which loan will benefit you the most.
In addition to loans tailored specifically to businesses, you might want to consider taking out a personal loan to meet the needs of your company. You can learn more about the various options available at the Personal Money Store.