When Should Creative Businesses Get a Loan?

    April 15, 2024

    When Should Creative Businesses Get a Loan?

    If you’re a creative entrepreneur wondering whether you're ready to seek financing, there are several factors that can help determine if it’s the right time for a loan. 


    As a creative entrepreneur, you're no stranger to the ebb and flow of your industry. Whether you're a designer, artist, or craft artisan, understanding the strategic use of funds can help you unlock your business and take it to the next level — and the question of when to get additional capital is key. Let's explore several considerations to help you decide if it’s time to take out a loan for your creative enterprise. 



    Considering a loan? Here's when it might be a smart move for creative businesses.


    How Does Seasonality Affect Your Creative Business? 

    One of the most important aspects to consider is anticipating your high-sales seasons. Do you have festivals or events coming up where you anticipate a surge in demand for your products or services? If so, you probably need additional funds for inventory, booth fees, extra staff, or equipment upgrades to meet the increased seasonal demand. Understanding your seasonal highs and lows can help you plan ahead and identify the right time to seek financing.


    What Are Your Monthly Costs as a Creative Entrepreneur? 

    Before diving into the world of loans or lines of credit, it's essential to understand what your monthly costs entail and how you can leverage them effectively. Knowing how to allocate funds responsibly — for things like working capital, inventory, or covering operational expenses during lean months — is key to sustainable growth. Maintaining a monthly income statement will help you keep tabs on your business’ financial health. This is especially important when you’re considering applying for a loan, as lenders will need to know your business’ debt threshold and debt-to-income ratio. 



    ✨ Tip: Hit the Magic Number for Getting a Loan


    A debt threshold is like a limit on how much of your business’ money can go toward paying off loans. To have a better chance of getting a loan for your business, it's best to keep your debt-to-income (DTI) ratio at no more than 36%. The lower the ratio, the better — that means you're using less of your money to pay back loans.



    Are There Any Growth Opportunities on the Horizon? 

    Evaluate potential growth opportunities that may require additional funding. Are there new markets you want to explore? Projects you want to launch? Investments in marketing or infrastructure that can take your creative business to the next level? Identifying these opportunities and understanding their financial implications through a cost-benefit analysis can help you make informed decisions about seeking financing.  


    Does Your Equipment Need an Upgrade? 

    Investing in equipment is a significant decision for creative entrepreneurs. Whether it's upgrading your tools to enhance your creative process or investing in machinery to scale production, it’s important to evaluate if you have the right equipment in place to support your vision. Consider how new equipment can add to your bottom line by streamlining operations, launching new or improved product lines, or rapidly deploying inventory to meet customer demand. Although it requires an up-front investment, a smart equipment purchase should pay for itself over time. Bonus: The equipment you acquire can be used as collateral toward securing loans or lines of credit in the future. 


    Planning Ahead for Your Small Business Loan

    With these considerations in mind, you should have a sense of whether it’s time for your creative business to secure a loan. Create a folder on your computer with your most up-to-date financial documents — including your business plan, bank statements, profit & loss statements, and résumés — so that you’ll be prepared to apply. Then, plan on giving yourself plenty of time to see the application and funding process through. Depending on the amount you’re requesting and your financial history, closing a loan in today’s economic climate can take anywhere from a few days to a few weeks. Avoid stress and unpleasant surprises by starting your application well before you need the cash in hand. 


    Deciding when to get a loan as a creative entrepreneur requires careful consideration of your business's growth trajectory, cash flow cycles, and strategic objectives.

    By identifying growth opportunities, understanding loan uses, and evaluating the impact that new equipment can have in your business, you can make informed decisions that propel your creative business forward. Remember, financing is a tool to fuel growth and innovation: Use it wisely to unleash your creative business' full potential! 










    See more small business resources for the creative industry here!