One of the best problems to have as a business owner is that you are growing quicker than expected. Many business owners find themselves in this position and realize that this growth is pushing them towards considering expanding to a new location or making changes to current locations to fit the higher demand. If you are in a scenario where you’re still paying off a loan for your previous project, but increases in demand are causing you to need more capital to finance growth and expansion, you may be wondering if it’s a smart idea to take out multiple loans at once (called stacking loans). Before you go ahead and get a second loan, we’ve provided some determining questions you should ask yourself to decide whether or not this is the right path for you.
How is your growth doing relative to cash flows?
We’ve already established that your business is most likely growing at a faster rate than anticipated. The next thing to thing about is how the growth is affecting cash flows. If you see that demand is off the charts, but your bank account isn’t really growing at the same rate, you might want to consider some sort of internal changes to rework your margins. However, if you find yourself working long days and fulfilling orders with barely any breathing room, and your checking account is as healthy as it’s ever been, you may be a prime candidate for a second loan. You want to make sure that this increase in demand isn’t just making your day to day more difficult, but that it is helping your profit margin as well.
How will the new money be used?
The next question you should ask yourself is how will the new loan be used? More specifically, will it have a direct impact on profit and margins? Let’s say you just took out a loan to start up a new franchise location, and now you are considering a second loan to upgrade to a new piece of equipment. Before you go ahead and make the purchase, you need to determine whether the new piece of equipment will translate to increased efficiency or lower costs. If it won’t, you may want to wait until your first loan is paid off because this added expense may not help your bottom line. On the other hand, if you are looking at upgrading to a piece of equipment that will speed up production time and save you money at the same time, looking for a secondary loan could be very beneficial. The same rational goes for hiring new employees. If you think that hiring new employees will allow you to meet customers’ demands at a more productive rate and earn you higher margins, then a working capital loan might be a smart next step to take.
How are the terms on your initial loan?
The terms of the first loan are important because they will dictate what you have available to you for your second loan. If your first loan has a lower interest rate, affordable payments, and doesn’t tie up a lot of collateral, then you are in a good place to be able to afford a secondary loan. Conversely, if you are already hurting to make the monthly payments because the interest rate is so high and you got a short term loan, or if you have already tied up all of your assets as collateral, you might not want to think about a secondary loan just yet.
Now that you’ve asked yourself these questions, you should be able to have a good idea of whether or not a second loan is the right choice for your business. At the end of the day, it comes down to whether or not you can cash-flow a new loan. If you need more capital or cash to meet demand, a loan seems like an easy fix. However, the timing of the loan is important in deciding your future financial position and how to best position yourself to be successful.