Top 5 Reasons Small Businesses Get a Loan
As business owners, your main goal is to make a profit and not accumulate more debt, which is why getting a loan takes a lot of consideration. For the 29 million small businesses in the US, borrowing funds has become a necessity. A small business cannot issue public stocks, or bonds, or look for venture capital unlike Silicon Valley startups or huge corporations. But for small businesses that need funding, there are business lines of credit and business loans available.
Although loans are technically debts, it’s considered good debt as long as it helps in growing the business. Unlike an auto loan or a credit card, typically used to purchase items that depreciate in value, business loans help borrowers increase value. Below are five main reasons to take out a business loan.
1. Build Business Credit for Future Loan Applications
Business owners discover on their first loan application that personal credit ratings can affect the terms of their business loan. If you have an excellent credit rating, loan providers are more willing to give better rates and terms for your loan. If you have a poor credit score, your business can be considered a blank slate.
Getting a business credit card or loan can be taken as an opportunity to start building credit for your business. Even if the loan is only $1000, making monthly payments on time will improve your score and help you achieve better standing in your next loan application.
When you apply for a business loan, ask the lender which credit bureaus they report to and what kind of information the reports include. The three major credit reporting agencies – Equifax, Experian, and TransUnion – gather credit information on businesses. However, unlike personal credit reports, data collection from businesses is less standardized.
Other methods you can use to build credit for your business are to open a bank account specifically for the business, set up your business phone number and address, and get an employer ID number or a tax ID.
2. Open a New Location or Expand Your Existing One
If your business has a physical location for an office or storefront, it is inevitable that an expansion will occur as the business grows. In order to serve more clients or customers, you would want to get a bigger space for your business.
If you’re providing services solely online, you still need to make some updates to your online store or website. You might add more services or more products to your listing. Customers may request certain features on the website. As your website gains more traffic, you also have to upgrade your servers to keep it working.
Getting a new location or expanding your current one will be a huge expense. Often, businesses cannot afford to cough up the cash required for this move. Small business loans may be your best option to fund a necessary expansion. Lenders can send you the funds within 2 business days after your loan is approved. Business loans are practical if the increase in business revenue is more than the cost of loan repayments.
3. Find New Talent
Small businesses usually start with one or two people dealing with all-around operations. But as you continue to grow your business, there will come a time when you need more people to manage daily operations. Payroll is a necessary business expense that can also take the largest cut of a small business’s budget.
When you onboard a new employee, you need cash to pay their salary. Unless your business is something that attracts interns or can pay staff in equity. Business loans can help you cover payroll for new employees until your cash flow can cover them.
There are payroll loans that are great options for businesses with seasonal employees. For example, if you employ additional staff during Black Friday sales or the holiday season, a one-time loan can be a good option.
4. Procure New Inventory
Inventory is a separate category from equipment. These are products and raw materials that are used to manufacture the final product you sell. It also has its own type of financing referred to as inventory financing. Financing new inventory can be done through a line of credit or an inventory loan. Loans are best for a large, one-time purchase of inventory. Meanwhile, a line of credit gives your business more legroom for unscheduled, regular inventory procurement.
An inventory loan is a practical choice if your small business has peak and off seasons. The loan can cover immediate needs and give you more budget for your regular business expenses such as rent and payroll.
Business in the hospitality industry or those that sell seasonal fruits, Christmas items, skiing, or bathing gear will likely have their up and down seasons.
5. Purchase New Equipment
One of the most common uses of a business loan is to purchase a fixed asset. Fixed assets are equipment or property that will generate income. There are specific loans to finance the equipment. Instead of a general business loan, these equipment loans are provided to purchase an expensive piece of equipment.
With an equipment loan, you can spread the cost of the equipment over months or years. You can also use the equipment as collateral for your loan. This means that your lender can repossess that equipment if you cannot keep up with payments.
The Equipment Leasing and Finance Association tells business owners that if they know that the equipment will be used for more than 3 years, it makes more sense to purchase it than to lease. Equipment loans can be used to purchase items such as computer servers, commercial printers, special machinery, manufacturing equipment, kitchen equipment, or kitchenware.
Bottomline
Business loans can become a growth opportunity as long as you use them wisely. Borrowing to fund a physical expansion, hire additional staff, or procure new equipment or inventory is an investment for your business. Make sure to compare various lenders and always remember why you’re taking out the loan so you can find the best offers.
