Should You Take on a Second Loan for Your Business? 5 Considerations

It’s no secret that it’s expensive to run a business, and many entrepreneurs choose to take out at least one business loan to finance their operations. The funds they receive are typically used to cover a wide range of expenses, including the cost of equipment, hiring staff, and business expansion. 

While some entrepreneurs can subsist on the funds from one business loan, others whose business is capital-intensive in nature may want to apply for additional financing. If you’re considering the latter, know that you have to weigh your decision carefully. If your business isn’t prepared to handle the additional loan, the increased debt burden may lead to difficulties in making timely payments and financial distress—which is the opposite of the growth you may have wanted to achieve in the first place.

Will it be worth it to take on a second loan, are you ready to deal with the risks, and are you capable of both paying back the loan and using it to add value to your business?  Here are five considerations you should make to help you reach a sound decision: 

1) The Loan Options Available

First, it’s important for you to choose the right type of business loan because it directly impacts your business’s financial health and your ability to meet your repayment obligations. Each loan type comes with its own set of terms, interest rates, and repayment structures, so you’ll want to select an option can make a positive difference to your bottom line. 

Take the time to do some research and familiarize yourself with the various financing options available. You should also understand the pros and cons of each type of loan to determine which one aligns best with your business’s needs and current growth rate. 

Compare the terms, interest rates, fees, and repayment schedules offered by different lenders. Look beyond the initial interest rate and consider the overall cost of borrowing, as well as any hidden fees or charges.

You can apply for a loan from various financial intermediaries. Commercial banks are the most common, as they offer different loan products tailored to small- and medium-sized enterprises (SMEs), including term loans, lines of credit, and business loans. 

Fintech companies like Maya also offer a business loan Philippines’ SMEs have used or are using. Maya Business, for instance, has the Maya Flexi Loan for small businesses. This product is a credit line that allows business owners with a Maya Business Deposit account to borrow money for their business anytime. The loan is instantly credited to their accounts, ensuring smooth and immediate access to funds that can be used for core business activities. What’s more, this product boasts borrower-friendly fees, allowing small entrepreneurs to focus most of their funds on their business plans. 

2) The Purpose of the Loan

You should also identify a specific purpose for your loan to provide you with clarity and direction. This will guide your decision-making process and help you prioritize the most urgent of your business’s financial needs. Whether you’re looking to expand operations, purchase equipment, invest in new marketing initiatives, or improve your cash flow, closely aligning your second loan with specific business goals will enhance the funds’ effectiveness and maximize their impact.

Evaluate the potential return on investment (ROI) associated with the intended use of your second loan. Assess the expected benefits against the cost of borrowing to ensure that the loan will generate positive outcomes for your business. 

If applicable, communicate the purpose of the loan with key stakeholders, such as your business partners, investors, or employees. Transparency about your borrowing decisions will strengthen trust among key people in your organization and put everyone in a good position to follow the business’s evolving strategic direction.

3) Your Current Debt Obligations

Of course, you will also need to account for the total amount of debt you currently owe and your existing repayment commitments to determine whether your business can afford to borrow more money. Compile a list of all your current business debts, including outstanding balances, interest rates, and repayment terms. This will give you a clear picture of your total debt exposure and help you understand the magnitude of your financial obligations. 

In addition, be sure to review your past payment records to identify any patterns of late payments or financial challenges. You should be able to address any past issues well before taking on additional debt. This attitude demonstrates financial responsibility and will enhance your credibility with your next lenders.

If you have multiple existing loans with varying interest rates and repayment schedules, explore the possibility of consolidating your debts into a single loan with more favorable terms. Debt consolidation can simplify your repayment process and potentially reduce your overall interest costs.

4) Your Business’s Creditworthiness

Your business’s creditworthiness can significantly influence your ability to secure favorable terms for the next loan you apply for. A strong credit profile demonstrates financial discipline and reliability, making your business more attractive to lenders and increasing your chances of obtaining competitive financing options. 

Thus, it’s a good idea to track your business credit score regularly to gauge your creditworthiness. Pay attention to factors that influence your score, such as your payment history, credit utilization, length of credit history, and credit inquiries. 

To improve your credit score, consider keeping your business’s credit utilization ratio—i.e. the percentage of available credit being used—low, so that you can demonstrate responsible credit management to your lender. Avoid maxing out your credit lines or carrying high balances on revolving credit accounts, as this can negatively impact your credit score and raise concerns among future creditors. 

You should also make an effort to pay your existing debts and bills on time to demonstrate your business’s overall reliability and creditworthiness. Moreover, make it a point to establish positive relationships with vendors, suppliers, and other business partners who report payment data to credit bureaus. Timely payments to these entities can help build your business’s credit history and strengthen its creditworthiness over time.

5) The Health of Your Business’s Cash Flow

Lastly, you’ll want to assess the health of your business’s cash flow before figuring out whether to take on a second loan. Cash flow is the lifeblood of any business, and your understanding of its dynamics is crucial for determining whether your business can accommodate additional expenses for loan repayments. 

A positive cash flow indicates that your business is generating more cash than it’s spending, which can support loan repayments and contribute to your long-term financial stability. On the other hand, negative cash flow or cash flow fluctuations may signal potential challenges in meeting loan repayments and could pose risks to your business’s long-term financial health.

Review your business’s historical cash flow statements to assess patterns and identify important trends, especially when it comes to repayments of your first loan or loans. Analyze inflows and outflows of cash, including revenue, expenses, loan payments, and other financial activities. Your grasp of your business’s cash flow dynamics will allow you to anticipate potential cash shortages or surpluses and make informed decisions about taking on additional debt. 

You should also be able to implement strategies that can improve cash flow efficiency and your ability to meet both your current and future loan payments. This may include reducing unnecessary expenses, finding a way to accelerate your accounts receivable collections, negotiating more favorable payment terms with suppliers, and maintaining appropriate inventory levels.

Your decision to take out a second loan for your business is something that can greatly affect its future, either for the better or for the worse. Consider the factors listed above to make a borrowing decision that reflects the former and that supports your business’s growth and financial health.

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