5 Reasons to Take a Small Business Loan

ByTop10.com StaffJul.09, 2018

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Reasons to take a small business loan
Most small business owners worry about taking out loans. After all, we go into business to follow our dreams and make money, not to accumulate debt. True as this may be, borrowing is a necessity for most of the 29 million small businesses in the United States.

Unlike large corporations and Silicon Valley startups, small businesses don’t have the luxury of being able to issue bonds, issue public stocks, or attract venture capital. But most small businesses can easily be approved for a business loan or business line of credit.

The word debt can have negative connotations, but a business loan can be considered “good debt” if it helps your business grow.

Unlike a personal credit card or car loan, which are debts spent on things that decrease in value, a business loan is designed to increase value for the borrower. Below are 5 reasons you could use your business loan to grow your business.

1) To Expand Your Location or Open a New One

If your small business operates out of a physical location such as a storefront or office, at some stage you’ll want to expand or move to new premises in order to grow and attract more business.

The same can be said for an online business: your website might have done of a good job of attracting new customers, but sooner or later you’ll have to add more features, upgrade servers, or open multiple URLs to keep your business going.

Expanding your existing location or website or opening a new one costs money – often more than your business can afford. A small business loan might be the best way of funding expansion. The best lenders will transfer you your funds within 1 or 2 business days of approval. As long as your new digs lead to you increasing your revenue by more than the cost of repaying the loan – a business loan makes sense.

2) To Build Credit for Future Loans

Your personal credit can affect the terms of your business loan, as many small business owners discover the first time they talk to a lender. If you have good personal credit, lenders will be willing to offer you favorable terms for your business loan. If your personal credit is poor, you could treat your new business like a blank slate.

Taking a business loan or business credit card presents you with an opportunity to build business credit. Even if you only take out a $1,000 loan (the minimum amount offered by most lenders), every payment you make on time helps build your credit and strengthen your case for a better loan the next time around.

When taking out a business loan, ask your lender whether it reports to the various credit bureaus and what data is included in the reports. Major credit bureaus Experian, Equifax, and TransUnion all collect data on businesses. But unlike personal credit, data-collection practices are not standardized.

Other good ways to build business credit include:

  • Applying to the IRS for a tax ID, or employer identification number (EIN)
  • Opening a business bank account
  • Setting up a business address and phone number.

3) To Finance Equipment

A common purpose of business loans is funding the purchase of fixed assets, meaning property or equipment used to generate income. Equipment loans differ from general business loans in that they’re made by a lender or equipment-financing company and are designed specifically for buying expensive equipment.

An equipment loan allows you to spread the cost of the purchase over several months or years. The equipment is put up as collateral, meaning the lender can seize the equipment if you default on payments.

Purchasing generally makes more financial sense than leasing if you plan to use the equipment for at least 3 years, according to the Equipment Leasing and Finance Association, but it may be too much money to lay out on your own without a loan.

Equipment loans are offered for things like:

  • Commercial printers
  • Computer servers
  • Manufacturing equipment
  • Specialized machinery
  • Kitchenware or kitchen equipment

4) To Fund New Inventory

Inventory refers to your business’s products and the raw materials that go into manufacturing the products. Because inventory is different from equipment, it has its own special type of financing called inventory financing.

This can take the shape of an inventory loan or inventory line of credit. Inventory loans are good for making a one-off purchase of a large amount of inventory. A line of credit offers flexibility to make regular, unscheduled inventory purchases.

Inventory loans are a great option for small businesses that have peak seasons and down seasons. Using a loan to cover immediate inventory needs helps free up cash for all your predictable monthly business expenses, such as paying rent and employees.

If you sell bathing gear or skiing gear, summer fruits or Christmas treats, or you operate a hospitality business, then you’re likely to be familiar with seasonal peaks and troughs.

5) To Recruit New Talent

Many businesses start off as one-person or two-person operations, but if your business expands you’ll eventually reach a point where you need assistance. Payroll can be the largest and simultaneously most necessary expense for small businesses.

Unless you operate the type of business where you can attract interns or pay employees in equity, you’ll need to have cash on hand from the moment your employees walk in the door. A business loan can help cover payroll until you generate enough cash flow to pay employees from your earnings.

Payroll loans could also be suitable for businesses that employ seasonal workforces. If you need extra help to meet the Xmas or Black Friday rush, then a one-off loan might be the best solution for your small business.

Summary

A business loan is an expensive growth opportunity that, if used wisely, will pay off for your small business in the long term. Whether you borrow money to expand to new premises, hire new employees, or finance the purchase of new equipment, there is a common thread: your loan is an investment to help your business grow. Compare lenders and keep the reasons for your loan in mind so you find the best business loan for your small business.