Should you take out a loan?

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Hi, this is Judi Otton and with GrowthCast and I’m back with your Fiscal Fitness Tip of the Week. One question I get a lot from business owners is should I take out a loan. Unfortunately, the very unsatisfying answer to this question is – it depends. But I’m going to give you three questions to think through. Should you take out a loan for yourself? Question number one, what’s it for? If it’s for efficiency improvements, it’s fairly straightforward to do an ROI or Return On Investment analysis. I have a current client that’s that just spent almost $1 million dollars on a set of improvements for their plant. This is a great use of their money. Because of the labor savings, they’re going to pay back this, they’re going to be able to get the return on this investment in less than two years. Plus they’re going to reduce their labor, they’re going to increase their capacity, and they’re improving working conditions for their staff. So that’s a win. Question number two that you want to ask yourself is how expensive is this money? What is it costing me to borrow this money? There’s a lot of capital out there, so make sure you shop around. Look at both the interest that you’re paying and any application or documentation fees that you might have to pay. Also take into consideration any pre payment penalties that there might be. The third question is, can I pay it back? You need to look at your future cash flow to determine this and make sure that you can pay this back. If you’re taking out a loan for something like just general working capital and you’re running at a loss, that’s a danger signal. That’s something that I probably would think really hard before doing because as your business stands, you’re not going to be able to pay this loan back. You need to fix the systemic issues with your business that are causing you to lose money before you start taking out loans. And I know that’s not always possible and there’s some grey area and I’m happy to talk that through with you. Also in the paying it back, If there are balloon payments, big payments at the end, make sure you’re setting aside money for that. If you have any questions about this or anything else, please feel free to reach out any time. My contact info is at the end of the video. This is Judi Otton from GrowthCast and I’ll be back next week with another Fiscal Fitness tip for you.

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