7 Typical Reasons Business Loans Are Used
There are dozens of reasons your business might need to take a loan during its life. For small businesses, taking out a loan is to enable the business to increase its profitability. And there are several options available to small business to take out loans including bank loans, credit unions, government loans programs, or private investors. Businesses can use their inventory as collateral when processing these loans.
Some business experts are against small businesses taking out loans because of the stress that it can place on the business regarding repaying. There are no set rules on whether loans are necessary, a business owner is in the best position to assess what the business needs to grow. A loan is just one of many ways to give a business the boost it needs. Depending on the origin of the loan, borrowing can be expensive since there are fees and interests attached to every loan.
Before taking out a loan, we advise businesses to calculate the total fees and interest throughout the loan before they make any commitments. Below are the reasons your business should take a business loan.
Business Expansion and Property
Banks are mostly willing to give loans to firms to purchase property to expand their business operations. Firms expand when they are turning a profit, their cash flow is ever rising, and they have a favourable or positive growth number for the future. These are the important indicators that banks are looking for before approving business loans. They are looking for signs that lending to your business is low risk, and these indicators only show that your business will meet up with the loan repayment schedule.
If you are borrowing to purchase a property, you can expect it to come in the form of a mortgage. However, long-term loans will require your business assets as collateral, and monthly payment will be taken from the cash flow or profits. You can take a business loan that can run anywhere from a few months to over 20 years and the interest rate will determine the repayment.
When it comes to acquiring equipment, businesses have two options available to them: they can purchase it, or they can lease it. Business owners who take out a loan to purchase equipment can get a tax write-off in the first year and stretch the depreciation throughout the time the equipment is being used for business.
They can then sell equipment that has served its purpose throughout its economic life or when it longer functions at optimum or is outdated. However, it is necessary to do a cost-benefit analysis to determine whether buying equipment is better than leasing.
Lenders approve intermediate-term loans for equipment which usually run for about three years or even less, and is repaid in monthly instalments. Repayment of such loans is usually attached to the duration of the usage of the equipment.
To Cover Your Stock
You can take a short-loan from a bank or loan provider for your small business if you have built credibility and trust with the lender. Having a decent cash flow, credit history with the bank and a positive balance in your business or personal account are credible ways to establish a beneficial relationship with your bank.
If your business is seasonal, such as a hospitality business, agricultural business, or even retail, you can take out a short-term loan to purchase inventory in advance. Business loans, for the purchase of inventory, are short-term; hence businesses work towards repaying the loans with revenue generated during the season.
When Your Business is in Off-Season
As mentioned earlier, you can take a short-term loan if your business is seasonal. Many small businesses depend on loans to remain operational during their off-season. You should take out a loan if your business operates seasonally. You can take out a loan to even out your cash flow. However, it may not be easy for a seasonal business to get a loan as many lenders prefer businesses that operate consistently throughout the year.
Getting the right loan will help you survive those low periods and keep your business afloat.
To Boost Working Capital
Every business need working capital to manage the daily business operations. You may take out a business loan to support operational costs until your business generates a certain volume in revenue. If you have an impressive credit record and a fantastic business plan, then you may be eligible to get a short-term loan.
A loan for increasing your working capital can help our business grow. However, banks consider working capital loans to have a higher risk than real estate loans, and as a result, they come with a higher interest rate.
When Your Business Has Achieved Maturity
Has your business has survived many difficulties? Have you have successfully repaid every loan taken at the early stages? Is your business running a clean book with balanced cash flow? You may be eligible to take out a low-interest loan. Some business experts believe that the best time to take a loan for your business is when the survival of your business does not depend on it.
If your business has a solid financial standing, you should be able to access a loan that will secure the future of your business.
When You Find Great Business Opportunities
At one point or the other, you will be offered business opportunities that may require you to take a business loan. Perhaps a client offers you a deal that you can’t turn down, but you need more resources to make it profitable. If you have done due diligence and you are confident that the offer will lead to business expansion and put you in a better financial position, then you should take out a loan.