MBA950 Q&A Wednesday: Should I get a business loan to grow faster?

Hey oh. Welcome to the Hundred Dollar MBA Show Business troops. You need to build the business you want with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the Hundred Dollar mba, a complete business training and community online. If you want to get a taste of the $100 MBA program, you could check Idea Validation Course. This is a seven part video course with a workbook to make sure you nail your business idea. Features, tagline pricing, anything you need validating. It's absolutely free. Just go to 100- MBA-NET Today's episode is a Q and A Wednesday Episode on our Q and A Wednesday episodes we answer a question from a listener. If you have a question you want to ask, just email me@omar100mba.net Today's question comes from Rebecca and Rebecca asks, should I get a business loan to grow my business faster? A very solid question. I know many people who are listening have thought about getting a business loan. Banks are super happy to give it to you and there's a whole lot of things you need to consider before you actually go out and get a loan to grow your business. I'm assuming that Rebecca is growing right now, but she wants to grow faster and that's why she's considering a business loan. I'm going to give you my Take my advice when you should consider and when you should not consider getting a loan. What are some things you need to think about before you make this decision? What are the consequences? What are some of the things you're going to have to face? Either way, we've got a lot to cover, so let's get into it. Let's get down to business. Today's episode of the $100 MBA show is brought to you by Microsoft Surface. When working on projects you love, you need a powerful laptop that hustles like you do. The new Surface Pro has a fast processor and all day battery life so you can run the programs you need when you're on the go. It's light enough to take anywhere and works with your iPhone so it's synced with your life. The new Surface Pro is the lightest, most powerful Surface Pro ever. So on Q and A Wednesday today, Rebecca emails and asks, should I get a business loan to grow my business faster? Now, if you're a listener of the show, you know how much I hate debt. I think debt crushes your business dreams because it's so easy to get caught up in debt and not be able to do whatever you want to do. In the short term, it often seems like a good idea to get a loan. But in the long term, sometimes it can really debilitate your ability to continue your whole business. But there are times when it's a good idea, and there are advantages to having a business loan. Number one, by getting a loan, you are not getting investors involved. Nobody is actually taking equity from your business. You're still in control, and you still get 100% of the profits. So those things are positives. And a lot of banks have some easy terms when it comes to business loans. Extending your loan to 24, even 36 months so you can have as much time to pay it off and the payments are a little bit smaller. But interest rates on business loans are not exactly the best. They could be as high as 10%. And if you're just starting out, it heavily depends on how good your credit is, as well as the assets you have in your current business. So I want to start out saying, if you have no revenue, if you haven't made any sales, if you have no reoccurring income in your business, do not get a loan, because you can't predict if you can actually pay off the loan. So in Rebecca's case, it sounds like she does have recurring income. She is making sales, There are profits coming into the business, and she can actually take a look and see how predictable, predictable the income is every month, how much money is she making? And banks are going to look at this before they actually approve the loan. And if you have that kind of steady income, you could take a look at how much you can scale with how much money. So say, for example, you get a loan for $100,000. Maybe that can go towards your inventory if you have physical products, and maybe you can push more sales, and you can be able to scale your business faster. If it's a straight equation like that, where you can see, I can make x amount of money more if I have more inventory, then you can actually predict how much money you can make with that loan. And therefore, you could see if you can actually make the payment. Defaulting on a loan is horrible, and having that debt over your head can be a huge amount of pressure. That's why you got to be very careful and make sure you have the cash flow to pay the payments. And ideally, your business does so well, you're able to pay off a loan early, or at the very least, pay extra every month to pay off the principal of the loan. Now, my second piece of advice is only Borrow as much as you need the minimum, the bare minimum, because your interest rate is going to be much lower with a lower amount of money. So if you just need to borrow, let's say $40,000, your interest rate is going to be much more reasonable than let's say $100,000. But now having said that, if you say, hey, I need $40,000 to have some sort of injection in my business, ask yourself the question, is there any other way I can make $40,000 in the business? Whether that's pre selling a new product where people put down reservations, whether that's running a certain promotion for your high end items, high ticket items, or maybe if you secure a larger client that can really help a lot, or the other end, maybe you can cut out costs to save that money and make up the 40 grand. So reevaluate before you actually sign on the dotted line. There are other ways for you to raise this money. I want to give you another alternative. I know it sounds like I'm trying to get you away from the loan, but it's true, if you can avoid debt, it'd be great. So another alternative is grants. Take a look at your city, your state, your country. There might be some sort of grant that you can get for your business. Governments do subsidize, they do help out businesses because you stimulate the economy. There could be some grants that you can apply for. It may take some time, but it could be really worth it. And sometimes a grant will be just as much or even more than the loan and you don't have to pay it back and it's yours to keep to work on your business. If you're rolling your eyes saying, oh my God, how do I apply to our grant? What do I do? How do I find these grants? Well, there's plenty of companies that could do all the dirty work for you can just google them and they actually just say, hey, we need these things from you. They file it for you, they do all that kind of stuff and they take a percentage of whatever the grant is. So it could be like 15%. They say, hey, we are going to charge 15% of whatever the grant is. So once you get the grant, you can pay them 15% of that amount and you're good to go. And often when you don't get the grant, they don't get paid. So it's kind of a win win. Now if you do get the business loan, I highly recommend you don't spend all the money at once. So say for example, you got $40,000 in your business loan, only spend a few thousand at a time. Spend 5,000. See how it affects your business. See if it scales at that margin, at that rate. See the effect of that kind of injection in funds. If you do see an uptick, great. Use a little bit more money. If you don't see an uptick, you should stop and ask yourself the question, why? What's going on here? I thought this would help. If it doesn't help in reality, you need to rethink things. It's totally okay for you to be like, you know what? This is actually not a good idea. The injection of the X amount of dollars is not going to really help. I need to rethink things in my business. Need to cut expenses, something else. You can take that chunk of money that you haven't spent. You can go back to the bank and say, hey, I don't need this loan anymore. I'd like to take this chunk of money that you gave me. I spent five or ten thousand dollars of it. I want to put it back into principal. I want to renegotiate my loan. So now I only have to pay back, let's say 5 or $10,000. Your payments are going to be much lower. You can shorten the term and it's no harm, no foul. Banks are totally okay with that. They rather you do that than default on the loan. It's better to take it slow, step by step when you have the cash to make sure that this idea actually is worth it. It's actually going to work in real life, in practical terms, in the real world. Guys. I got more on today's episode. But before that, I got to give love to today's sponsor. Today's episode is supported by Earth ClassMail. What I love about Earth ClassMail is that they set you up with a swanky business address. So I work from home. I don't need to have a business office. We actually tried that a whole bunch of times at different locations, and I just can't stand the commute. So what we did is we got an Earth class mail address. And with Earth class mail, we have an address and everything that gets sent to that address gets scanned and uploaded to our account in the cloud. That means I never have to deal with any physical mail. Anytime they do it all for me, it's like having my own secretary. And then if I do get a piece of physical mail I want to have in my hands, they can forward it to any address I'd like. Super simple. Saves me a ton of headaches. And I don't have to have an office. Earth ClassMail wants to hook you up with a free month to get started. Just go to earthclassmail.com mbamonth and use coupon code MBAMONTH. Again, that's earthclassmail.com MBAMONTH Coupon code MBAMONTH so I hope Rebecca, in today's episode I answered your question about getting a business loan for your business to grow faster. Take a look at all the options I presented. Take a look if there are some alternatives that you can explore. And if you do take that loan, take it in steps to see if this actually will help your business. Alright, that wraps up today's episode. In tomorrow's episode, I'm going to be discussing if you should charge for premium support. Support has become a premium now in today's economy. So many companies, instead of just offering one way of support, they're offering different types of support and charging for the higher tiers. So for something like phone support, you can pay extra every month to get that as a customer, but you'll get email and chat support for free. Is this a good idea? Is this something that can actually increase your revenue or will this disgruntle customers? We discussed that in tomorrow's episode. So make sure you hit subscribe so you can get that automatically. Alright, that's it for me today guys. Before I go, I want to leave you with this. Whenever it comes to debt, you need to make sure you are very careful. You know, you want to make sure that you're profitable as possible, that you're debt free as possible, and that you don't have any ties or any kind of thing that's going to hold you down from growing and expanding as an entrepreneur. Cash flow is king and debt is the devil. Okay, thank you so much for listening to the $100 MBA show. I'll check you in tomorrow's episode. Take care. Of sam.